Development of Trade Support Services

Gerald Ollivier and Pedro N. Taborga

's~~~~~~~~~~~~~~~~it al,.11

ECSINWorking Paper No. 12

Infrastructure UnitEurope and Central Asia

The World BankNovember 1999

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

ECSIN, the Infrastructure Sector Unit of the Europe and CentralAsia region of the World Bank, is responsible for the Bank's work in thetransport, urban and water sectors of our 27 active member countries.

The Working Paper series is intended to make available morewidely, inside and outside the World Bank, papers produced in thecourse of our work that may be of broader interest -- especially to theinfrastructure community in our member countries. The viewsexpressed are those of the authors and should not be taken as formalstatements of World Bank policy

Reactions from readers are always welcome and may best beaddressed either to the named author, c/o World Bank, 1818 H. St.N.W Washington, D.C. 20433, or to the Director, ECSIN at the sameaddress. The Director's E-mail address is: RHalperin@Worldbank.org

Acknowledgements

This paper was produced as part of the strategy formulation for the Bank's work in theinfrastructure sector in the Europe and Central Asia region.

We would like to extend our special thanks to Ricardo Halperin, Christopher Willoughby, Hans J.Peters, Eva Molnar, Carlos Silva, Anders Bonde, Hafez Ghanem and Graham Smith for theirhelpful comments and discussions on earlier drafts. Additional thanks go to the long list of Bankstaff who provided us with precious information, notably Kishore Nadkami, Shunso Tsukada,Ronald Kopicki, Jean Charles Crochet, Mirtha Pokorny, Fabio Galli, Harald Hansen and FrancisNg, as well as people outside the Bank and notably Valerie Rouvereau. The report also hasdrawn on the references listed in the bibliography. The authors gratefully acknowledge thesupport provided by Nadezdha Ouzhinskaya, Iris Moreno and Claudette Morgan in finalizing thereport.

DEVELOPMENT OF TRADE SUPPORT SERVICES

Gerald Ollivier and Pedro N. Taborga

Table of Contents

EXECUTIVE SUMMARY ........................... .....

INTRODUCTION ............ .. ..... . ... .... ..... . ..... . ..

1. THE NEED FOR CHANGE ................ .......... ... ....... . . ................ 5

II. BARRIERS TO TRADE . ... ..... ................... ...................................... ........... 8

A BARRIERS TO ACTIVE COMPETITION ..................... ....... ................................. 9...... ........ ..... ....... 9B. BARRIERS TO OPERATIONS ........... ................ ........... ................... .. ..................................... .. 10

III. THE ROAD AHEAD ................ .. ......... 1......2.......... ..................... ....................... 12

A. AVAILABILITY OF INFORMATION .................... ... ... .. . ....... 12B. FAIRNESS OF COMPETriTON .......... ......... .. ... ... .................................... ..... 13... .. ........... 13C THE RIGHT TO ACT INDEPENDENTLY ... ...... .......................................... ......... .. ............... 15D APPROPRIATENESS OF LEGAL FRAMEWORK ... ............ .............. ..... ... .1..... ............... ... ..... 16

IV. CHANGE AGENDA/BANK ASSISTANCE .. ................................. .. 19...... ........................ 19

A. AN AGENDA FOR CHANGE ..................... ....... .... ............. ... 1.......... ........................ 19B. POSSIBLE BANK ASSISTANCE ............ 2.........0... ... . ........ . ......... .. .20

ANNEX I REFERENCE BOXES NUMBERS 15 THROUGH 24 .. .............. . ........... ............... 25ANNEX 2 LEGAL AND REGULATORY FRAMEWORK TYPOLOGY OF PRIORnIES IN ECA . 30ANNEX 3 APEC COMMON ACTION PLAN OBJECTIVES ON CUSTOMS PROCEDURES ..... ...... ... 37

REFERENCES . . .3................ .......... . ... .................. ........ .. ..... 39

List of Acronyms

AIVP - Intemational Association of Cities and PortsEU - European UnionFDI - Foreign Direct InvestmentFIATA - Federation of International Forwarding AgentsIAPH - International Association of Ports and HarborsICC - International Chamber of Commerce.ICHCA - International Cargo Handling Co-ordination AssociationIMO - International Maritime OrganizationIRU - International Road Transport UnionMEPC - Maritime Environmental Protection Committee (under IMO)PIANC - Permanent International Association of Navigation CongressesTWUTD - Transportation Water and Urban Development Department, Transport DivisionUIC - International Union of RailwaysUNCEFACT - United Nations Center for Facilitation of Procedures and Practices for

Administration, Commerce and TransportUNCTAD - United Nations Commission for Trade and Development.WCO - World Customs Organization.WTO - World Trade Organization

Country Grouping

Group [: Croatia, the Czech Republic, Estonia, Hungary, Poland, the Slovak Republic, Sloveniaand Turkey

Group XII: Latvia, Lithuania, Albania, Bulgaria, FYR Macedonia, Romania and Bosnia andHerzegovina

Group Mf Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Moldova,Russia, Tajikistan, Turkrnenistan, Ukraine and Uzbekistan

FSU Counteries : Group III, plus Estonia, Latvia and Lithuania.

DEVELOPMENT OF TRADE SUPPORT SERVICES

Gerald Ollivier and Pedro N. Taborga

ExEcuTivE SUMMARY

The Europe and Central Asia region (ECA)1 has undergone drastic economic and politicalchanges over the past ten years. Differences in the pace of reform and other countrycharacteristics have led to increasing heterogeneity in the region. For the purpose of this paper,three main groups2 of countries have been defined: Group I: Higher Growth Countries; Group II:Intermediate Growth Countries; and Group III: Lower Growth Countries. Grouping by growthwas used as a proxy for the degree of success in bringing about economic reforms.

Trade in ECA has been deeply transformed in the nineties, with a strong increase ofinternational trade and exports (increases of 50 percent for Group III countries; and up to 90percent growth for other countries) and a shift of trade towards Western Europe3 . The ability ofECA countries to further integrate into the global economy depends, beyond their capacity todesign and produce, on the ability to market and distribute their products competitively. In thisregard, the quality and cost effectiveness of trade support services4 available are important.However, weak corporate governance of enterprises more generally has slowed down progress insome cases. The historically high involvement of governments in providing transport anddistribution services makes change particularly difficult. As a result, the emerging private sectorsin ECA have faced considerable barriers to trade.

Despite progress alleviating some of them, common barriers still represent seriousimpediments to countries' economic success. Broadly speaking, they have prevented thedevelopment of open competition by allowing the coexistence of different rules for public andprivate operators; restricting entry; allowing monopolies on key infrastructure such as ports; andimposing discriminatory rules on foreign operators. Operations have been hindered by variouslegal and regulatory obstacles: unstable, incomplete and unclear legal environment for investmentsand operations; lack of international integration through participation in, and enforcement of,international conventions; trading conditions different from those generally accepted; pricecontrols; cumbersome border crossing and customs procedures; insufficient infrastructurefinancing; and limited recourse against harassment from civil servants (tax collectors, customsagents, licensing authorities, etc.).

' Countries considered are: Armenia, Albania, Azerbaijan, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, CzechRepublic, Estonia, FYR of Macedonia, Georgia, Hungary, Kazakhstan, Kyrgystan, Latvia, Lithuania, Moldova,Poland, Romania, Russia, Slovak Republic, Slovenia, Tajikistan, Turkmenistan, Turkey, Ukraine, Uzbekistan.2 Groups are detailed in the introduction.3 Trade shares of the European Union being 60, 50 and 42 percent respectively for Group I, II and III.The range of services required for distribution of products and trade includes: transport, management and control

of freight movements, warehousing, packaging, freight forwarding, customs administration, insurance, banking,financing and management of transport/telecommunication infrastructure, information technology for trade, tradepromotion.

Since many Governments in ECA lack both the financial and the managerial capacity toprovide appropriate trade support services, their role needs to shift to the creation of an enabling-environment for the development of such services by the private sector. The degree of success inthis effort will depend on the capacity to formulate a legal and regulatory framework aimed atmaximizing the number of new entrants to foster intensive competition. Such framework shouldfocus on four main parameters: (a) the availability of information (trade volumes, tariffs, servicesoffered, regulations and laws applicable); (b) the fairness of competition; (c) the right to actindependently; and (d) the appropriateness of the new legal instruments.

The enhancement of trade support services and reduction of distribution costs in ECArequire the following actions : (a) the redefinition of the role of the government in the area; (b)efforts to raise awareness and build public-private partnerships; and (c) the formulation of anenabling environment. Pace and modality of implementation of these changes will differthroughout ECA according to country specificity, although the nature of the changes requiredwould remain similar. A detailed list of priority actions is provided in Annex 1.

An Agenda for Change

Thus, a change agenda for ECA countries begins to emerge in terms of three fundamentaldirections of reform:

a) Redefinition of the Role of the Government

o Commercialize infrastructure management, withdraw from operations and increasereliance on private sector.

* Strengthen government's institutional capability to formulate policies and enforcelegal and regulatory frameworks.

b) Awareness and Development of Public/Private/International Partnerships

Nationally:* Ensure provision of training in logistics.e Facilitate emergence of local associations affiliated to international associations

(IRU, UIC ... ) to certify quality, advertise, offer human resource training.o Strengthen Public-Private Partnership in preparation of new legal and regulatory

framework.e Ensure availability of information on legal and regulatory frameworks and business

opportunities.* Establish recourse system for users against abuse of power.

Internationally and Regionally:o Strengthen international convergence of legal and regulatory frameworks.. Ensure compatibility with international practice.

* Select and adopt internationally accepted standards for communications andelectronic data transfer.

c) Formulation of an Enabling Environment for the Development of TradeSupport Services:

* Complete trade related legislation: definition of liability, contract of carriage, salescontract, financial transactions schemes according to international commercialstandards and trade practices

* Draft missing regulations (e.g. on market access, licensing of transport operators,third party interest regulations (safety, liability, user charges)), and a series oftransport laws (Annex 1)

* Deregulate to ensure fair competition, fair and equal entry, independentoperations.

* Streamline and reform customs operations on the basis of the Kyoto Convention,WTO Agreements, and other international practices (EU, APEC. ).

* Facilitate regional economic integration

The Bank's Role. The Bank can support and is supporting this agenda in various ways asdemonstrated by projects and sector work since 1976 to support trade development, including. (i)sector projects focusing on transport logistics or on specific bottlenecks; (ii) macroeconomicapproaches in Structural Adjustment Loans focusing on export finance, market and priceliberalization, specific tax and tariff reforms and the overall regulatory framework for tradesupport services, (iii) studies dealing with issues such as trade facilitation and transport logistics,and (iv) competitiveness projects that explicitly target trade facilitation, export development andproduct and services marketing. The achievement of full benefits of trade facilitation requires thiscomplex collection of issues to be approached with a multi-sector perspective within countryassistance strategies, with close cooperation among the various sector units of the Bank and withother international bodies (UNCTAD, UNDP, WTO, IMF, EU, UNECE, ECMT .. )

iv

Table 1: Nature of World Bank Assistance to Trade Support Services in ECA

Objective Actions-Redefine the role of the E Institution reviews and human resource developmentGovemment D Institutional strengthening

o Maintenance and assets management improvemento Operational efficiency improvementa Privatization Processes

Raise Awareness and a Transport Sector ReviewsIncrease Public/Private/ o Competitiveness and logistical chain analysis.Intemational D Provision of technical assistance in supply chain management.Partnerships ° Support of regional initiatives involving multiple intemational

organizations for designing projects in support of transit, tradefacilitation or regional integration.

D Building up of private-public partnerships in the context of projectsa Introduction of EU-compatible regulations.o Building up of information systems.o Introduction of Metrology, Testing, Technical and Quality Standards

Formulate an Enabling a Formulation of Strategic and Action PlansEnvironment Technical Assistance

o Customs Reform (documentation, processes, structure).

Improve private sector D Strengthening of financial sector regulations and Central Banks'access to financing. inspection capacity

o Assistance in privatization of financial institutions and development ofdomestic financial markets

a Facilitation of market entry for foreign banks

o During the transition, these actions could be supplemented by.

o Providing lines of credit or guarantees to private banks to finance tradeand transport facilitation projects

o Financing micro-infrastructure where private sector has not stepped ino Providing financing for information technology

DEVELOPMENT OF TRADE SUPPORT SERVICES

INTRODUCTION

The Europe and Central Asia region"(ECA) 5 has undergone drastic economic and politicalchanges over the past ten years. Its heterogeneity has increased due to differences in the pace ofreform and factor endowments. In several countries, internal and external crises slowed downdevelopment (e.g. Pyramid crisis in Albania, and war in Croatia, Serbia and Bosnia-Herzegovina).The real GDP average growth for the region in 1998 was estimated at -1.3 percent but individualcountries ranged from -8.6 percent to + 10.1 percent. We have grouped the countries accordingto their GDP and trade growth since 1993 into: Higher Growth; Intermediate Growth, and LowerGrowth Countries. Growth performance is a proxy for measuring the degree of success ineconomic reform across sectors

The Russian crisis of 1998 has highlighted6 the correlation between the advances ofstructural and legal reforms and the ability for countries to withstand economic crisis inneighboring countries. Central and Eastern European countries showed a much strongerresilience than Former Soviet Union countries. This resilience stemmed notably from a betterdiversification of trade towards the European Union and a broader range of export products Bycontrast, Former Soviet Union countries remained highly dependent on Russia as a trading partnerand offered a narrower set of exports7 .

Real GDP Evolution

1 40 Source EBRD

Eastern Europe and

] 120 ~ the Baltic States

100

* 80

a 60

40 -t

4 0 iCIS Countries 20

0

1991 1992 1993 1994 1995 1996 1997 1998 1999

5 Countnes considered are Armema, Albania, Azerbawjan, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, CzechRepublic, Estonia, FYR of Macedonia, Georgia, Hungary, Kazakhstan, Kyrgystan, Latvia, Lithuamna, Moldova,Poland, Romania, Russia, Slovak Republic, Slovema, Tajikistan, Turkmenistan, Turkey, Ukraine, Uzbekistan6 See EBRD, Transition Report, April 1999.

Commodities represent more than 60% of the exports for most FSU countries.

2

Cumulative F]DII per capiat versus change ina trade

1800 -

Co 1600 1 3 Hungaryam

co 1400

< 1200

8 1000 n Czech Republic Estonia a

aL 800 0. 800 Latvia

a 60 Slovenia 134)600-aX 400 Kazakhstan Croaba 13

40 -E Slovak Rep u b nd

=200 Bn Romaniao e00gi TajAlbu% Kyr oMoldova Belarus

0 4 u i II I , Ii F I I I, I I

0°J 5% 10% 15% 20% 25% 30%

Annual Trade Growth since 1993

Group I1 HBigher Growth Countries: includes Croatia, the Czech Republic, Estonia,Hungary, Poland, the Slovak Republic, Slovenia and Turkey. These countries have movedsignificantly along the path of economic restructuring, and had a Gross Domestic Productper capita in excess of US$3,000 in 1998 (US$9,829 in Slovenia). They attracted US$35billion of net Foreign Direct Investment (FDI) over the period 1989-1997 (see graphabove) Higher-growth countries reached in 1998 at least 90 percent of the real level ofGDP attained in 1989, except for Croatia (78 percent). Growth in these countries, driven byincreases in internal consumption, trade and investment, has been accompanied by theprivatization of small companies, which will be followed by the privatization andrestructuring of large enterprises and traditional industries, public monopolies andinfrastructure. The strong political willingness to join the European Union or to become aclose partner (Turkey) in the near future is a powerful force in the restructuring process inmany of these countries.

Group E Intermediate Growth Countries: includes Latvia, Lithuania, Albania,Bulgaria, FYR Macedonia, Romania and Bosnia and Herzegovina. The economic reformsare gradually taking hold in these countries. Their GDP per capita ranged between US$700and US$2,500 in 1997, and represented between 56 percent and 80 percent of 1989 realGDP. FDI reached US$5.3 billion9 or between US$128 and US$624 per capita over theperiod 1989-1997. As with the first group, the political willingness to become a EuropeanUnion member is a powerful incentive to restructure.

8 Alb - Albania, Bul - Bulgaria, FYR - FYR Macedonia, Kaz - Kazakhstan, Taj - Tajikistan.R2= 0 45 (without Armenia, Belarus, Czech Republic, and Hungary). Armenia shows high growth in trade mostlybecause it started from very low.9 These figures do not include Bosnia and Herzegovina.

3

Group m Lower Growth Countries: includes Armenia'", Azerbaijan, Belarus,Georgia, Kazakhstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan.Average growth was positive in 1997 for the first time this decade but with great variationsamong countries. Some smaller countries like Georgia managed to exhibit strong growthperformance -- although from a low initial base -- while larger size countries like Ukraineshowed little or no growth. Lower growth countries' real GDP in 1998 was on average at55 percent of its 1989 level Productivity gains are smaller than in the other two groups ofcountries. Foreign Direct Investment per capita (US$70) over the period 1989-1997 wasfive times smaller than in the two other groups of countries (US$350) and reflected theperception of a more uncertain and unstable environment

Change in GDP per capita growth versus change in trade"

35%

0) Belarus *- Armeniaa 30% Lithuania

25% * Latvia Estoniam

20% - Azerbajan

15% -

O Kyrgyzla Albania Slovak Republic * PolandO10% Ru6'k Kqg UC) 10% sa K FYR *Czech Republic

no i *RomaniaXgaria Taj Slovenia

5% Uzbekistan * Moldova Hungary

0%

0% 5% 10% 15% 20% 25% 30%

Annual Trade Growth since 1993

Trade Support Services. The different growth performances found in ECA seem to bestrongly correlated with: (i) the pace of reform, (ii) attraction of FDI; and (iii) trade development.These are also reflected in the trade support services available. Trade support services cover therange of activities required for distribution of products and trade, i.e. transport, management andtracking of freight movements, warehousing, packaging, freight forwarding, customsadministration, insurance, banking, financing and management of transport/telecommunicationinfrastructure, information technology for trade, and trade promotion.

The report is organized in four sections as follows:

'° Growth wise, Armenia and Belarus would belong to the first group. However Annenia started her recovery froma very low point and Belarus growth is unsustainable, which warranted their inclusion in the third category." Whlle there is a broad association between trade and growth, there is also wide dispersion among countries inthe specific relationship over short periods of time, as illustrated by outliers Hungary, Belarus and Armenia in thechart, and the R2 of only 0. 15.

4

Section II analyzes the demand for trade support services emerging from the economicchanges in ECA. These services are critical to country competitiveness, and it is in the interest of-public policy makers to encourage their provision.

Section [1[ identifies the trade barriers most commonly found. These barriers have beenalleviated to various degrees with the support of donors, professional associations and businesspartners. Nonetheless, some of these barriers remain and have a double impact . (i) increasingcosts significantly, e.g. 5 percent of GDP in excess costs in Ukraine; and (ii) reducing countryexport competitiveness

Section 1[1 outlines the nature of the changes required to improve the supply of tradesupport services

Section RIV focuses on the priorities and the potential role for the World Bank in supportof the definition and implementation of change.

5

I. THE NEED FOR CHANGE

Reduction of Excess Cost in Trade Support Services. The direct excess costs of tradesupport services in ECA resulting from barriers (described in Chapter II) commonly reach 6 to 7percent of total trade value (Box 1). In a country like Ukraine, it represents annually US$2 7billion or 5% of GDP'". The emerging private sectors have started developing more efficient tradesupport services in ECA, but face a number of physical, legal and administrative barriers Thedirect impact of these barriers is most significant in lower growth countries. Barriers reducecountry competitiveness (Box 2), precluding return to growth. Barriers also reduce the volume oftransit services provided'3 , and deter foreign investment'4, since local output is difficult tointegrate reliably in international production chains.

Box 1. Estimated Cost of Trade Barriers Box 2. Anecdotal Evidence of Barrier Impacts:Export of Wine Additives.

The World Bank Transport Sector Reviews forArmema, Belarus, Moldova and Ukraine specifically A French producer of wine additives sells itsestimated the overall trade and transport related products to Moldova, Greece and Ukraine and getsexcess costs and yielded figures in the range of 6 to quotes from an international carrier (Air and Road)8 percent of total trade (export + import) in each to transport wine additives from Bordeauxcountry. The cost of services associated to trade (France) to Moldova, Ukraine or Greece (similaramounted to 17 percent of the overall trade distance). The price quoted by the road transportertransaction costs compared to a 10% international were 6 times higher in the case of air transportaverage. (monopoly of Air Moldova) There are several

factors to be considered as causes to the pricedifference: the availability return cargo, actual

Service Costs as Percentage of Trade Transaction time and costs of delivery (waiting time atborders), risks, etc...

Ukraine

Belarus . Transport Price in FRF/kg (100-200kg load)

Moidova from France

ArrreniaAIrtnernainal S50

International ______________________________ *~~~l a M oldova

0% 5% 10% 15% 20 *3Greece

Source: World Bank Transport Sector Reviews: 20 1 cUkraineArmenia, Moldova, Ukraine, Belarus 0

Air Road

Source: Laffort Oenologie, 1998

12 Republic of Ukrane Transport Sector Review, November 30, 1998, Report No. 18636-UA.13 Forwarders commonly state that their routing selection depends largely on the barriers faced on variouscorridors.14 The decision on location of new factories supported by foreign direct investment frequently hinges upon theavailability of reliable transport links, unhindered by inappropriate interactions with border agencies

6

Changes in Trade Patterns. Despite trade barriers, trade patterns and relationships havebeen deeply transformed in the Europe and Central Asia region (ECA) in the nineties, and have-been closely linked to the macroeconomic evolution of these countries. Export volumes haveincreased by 90 percent for higher-growth and intermediate-growth countries and by 50 percentfor low-growth countries over the period 1992-1997. The export to GDP ratio reached 32percent for higher- and intermediate-growth countries in 1997 and only 21 percent for lower-growth countries, underlining the stronger export orientation in the former. Higher-growthcountries"5 have reoriented their trade towards the European Union (60 percent of trade),exchanging mostly manufactured goods. Intermediate growth countries have followed a similartrend with about 50 percent of their trade with the European Union and a large share ofmanufactured goods Lower growth countries' main trade partner is also the European Unionwith about 42% of trade, exports being dominated by Russian exports (81 percent) of rawmaterials (oil, gas). Most of ECA trade growth was caused by the increase in trade with EUcountries. While traditional trade served the purpose of regional specialization and stabilizationaround Russia, new trade patterns in ECA reflect a shift toward economically justified trade linksin a trade globalization context.

Intra-Industry Trade lDevelopment. Intra-industry trade in subcontracting or jointventures is developing in Group I countries Companies provide intermediate inputs to customersbased in other countries. These companies become partners in international production chainsand focus on taking advantage of their unused capacity and lower labor costs. This developmenthas been made possible by the fast transformation of information technology that enables closecommunication between geographically distant partners and better management of processes,including distribution. FDI-supported car manufacturing is an example of such type of co-production arrangements. This intra-industry trade develops only to the extent that all theprerequisites necessary to meet the marketing and distribution practices of the foreign partnerscan be met. The ability to cope with such stringent demands has led to the emergence of a newtype of industries and managerial practices, which are to a large extent responsible for the solideconomic and export growth recorded in Group I countries.

Competitiveness and Trade Support Services. Succeeding in a global marketenvironment requires efficient trade support services that expand the competitiveness range ofcompanies (Box 3) by lowering total distribution costs, and enabling companies to become part ofproduction chains. The right type of trade support services is determined by the needs of the finalclients. In the ECA region, meeting the needs of foreign clients has become a priority. Whilesignificant, transport services represent only a quarter of total logistic costs'6 , roughly equallydivided between transport into/within, and away from the manufacturing process. Thedevelopment of all other trade support services as defined on page 4 is equally ciitical.

Reduction of Inventory Costs. In an effort to reduce their total distribution costs,companies attempt to systematically reduce the level of inventories and its rel,ated costs (buffer

'5 Hungary, the Czech Republic and Poland account for 64 percent of import and export between EU and Higher-Growth Countrnes. Exports from EU increased by 19 percent in 1996 (84% manufactured goods) Source . Eurostatmemos16 As estimated by the Gennan Bundesvereimging Logistiek

7

stocks, warehousing cost, tied up capital). Inventories can be reduced when the delivery time isassessed accurately by companies. It explains that reliable lead-time17 coupled with trackinginformation technology has become the most important parameter for choosing transport services(Box 4). Reduced inventories imply also frequent and small-size shipments and increasedflexibility of service providers. The historic modal shift from rail to road transport and adevelopment of third-party contracting for the provision of integrated door-to-door services aretwo consequences of this trend.

Box 3. Competitiveness Range Box 4, Logistic Index StudyA study compared three industries in nine countries

60 - __ - around the Baltic Sea using the European Logistic Index,50 wlich identified lead time as the most critical element

DIs rlbution C st. for trading companies (Graph below). The study thrber40 - . : confirmed that Western European companies have access

20 - duction to faster, cheaper and more reliable logistic services than1 0 - < w : Baltc Countries and Russia.

0 Kev--Country A Country B Key Parameters for Companies

Safey Stdk

Despite Country A's higher production cost, itscompanies are competitive on a wider geographic am _ dTrange than country B's compaties, due to lower Dis o

distribution cost.Source: The Baltic Logistics Index, Logistics

Consulting Group

Lag in Corporate Response. The corporate response to the challenges of tradedevelopment has lagged to different extents in the three groups of countries Corporaterestructuring has faced some setbacks due to insiders' control or lack of transparency inownership in many enterprises that resulted from the first wave of privatization. Side by side withcompetitive, export-oriented companies, the old-style companies subsist even in Group Icountries These companies are ill equipped to adapt to their new competitive environment.Their business strategies still focus more on production than distribution, which leads to higherlevels of inventories. Protectionist policies may artificially safeguard these companies, butactually weaken their comparative advantage in the medium run, and reduce their capacity toexport and grow and their ability to finance their own development.

The Redefinition of the State's Role. The historical omnipresence of the state in theprovision of transport and logistical services lingers on. The type of centrally planned services,without customer focus, may explain in part the lag in supply or corporate responses in Group III(Box 5) Today the drop in traffic combined with tariffs that typically do not cover costs hasaggravated transport losses ECA Governments, under tight budget constraints, have difficultymaintaining, rehabilitating and investing, which leads to an erosion of the asset base, lack oftechnological innovation and lack of appropriate trade support services. In response to thispressure on limited budgets, most countries have moved to a more or less progressive

t7 Lead time is the time between receipt of an order and physical delivery of goods.

8

disengagement by the State, transferring trade support services to the private sector. Thesetransfers however have been less effective when the legal and regulatory framework required for a -functioning market economy is still undefined.

Box 5. The Transport/Trade Sector Prior to 1991 in FSU.

Prior to 1991, Transport Ministries in FSU were managing large state enterprises integratedl across the Unionassunng freight and passenger transport. Other Ministries also managed some specialized fleets of trucks. Alldecisions were taken at the mhinisterial level. State enterprises were dealing with a wide range of non-transportrelated services. This structure resulted in very limited improvement in the quality of logistical services under theFSU and a legacy of centralized decision making. The inventory costs were not ascounted for as no one wasspecifically accountable for them. Trade flows were also centrally organized and FSU countries were ill-preparedfor the challenge confronting them when attempting to developltrade

11. BARRIERS TO TRADE

Despite the heterogeneity of the region, similar barriers have prevented the provision ofefficient and cost-effective trade support services. As long as these barriers exist, trade supportservices will remain costly and retard trade development. A review of barriers to trade andtransport shows that inappropriate legal and regulatory frameworks, restrictive practices, lack ofprofessional training in modem trade and transportation techniques, as well as general uncertaintyin the business environment, constitute the most substantial sources of excess costs having abearing on trade development. The case of Ukraine is outlined in a text table below (page 9). Itillustrates that a country able to remove the barriers would reduce substantially the costs of tradeand generate opportunities for the provision of additional services"8 Progress in this regard isespecially noticeable in Group I and II countries, presumably due to the stimulus for reform andtrade growth provided by the aspiration to EU membership The following paragraphs illustratebarriers to trade that still exist in countries at an early'stage of their reform process.

The initial set of conditions under which companies operate has limited: (a) competition intrade support services and (b) efficient and sustainable provision of services. These barriers arerooted in the following: (i) attempts to preserve the status quo; (ii) legal and regulatoryframeworks, which may hinder international trade; (iii) weak capacity to formulate, implement andenforce new laws and regulations; (iv) political instability; (v) lack of understanding of theconcept of government as a facilitator of private activity; (vi) resistance to change from fear oftransitional disruptions.

The barriers themselves are seen as interfering with both competition and operations.

8 A country like Singapore illustrates well the power of advanced trade support services m a national economy.

9

Barriers and Impacts observed in the Ukraine Transport Sector Review

Type of Some Barriers to Some ImpactsService operations and

active competitionTransport Dysfunctional border Long waiting time leading to

crossings > High financial cost for the transported goods (local borrowmg rates are(systematic inspections, high)lack of coordination > I High cost of transport services (immobilization of transport equipment andbetween agencies, operators)19

unclear procedures, > Impossibility to rely on the timely delivery of the goodsmultiple payments, lackof proper facilities) Petty corruption leading to

> Additional costs (payment m kind or cash)> Diversion of traffic to other corridors (loss of transit revenue)

Inappropnate > Long waitng time to obtain permitsprocedures, standards > Artificial costs (mandatory escort, payment for procedures addmg no value)or market access rights > Licenses to operate trucks abroad distnbuted on a preferential basis

> Lumited river transport (due to a de facto monopoly)

Non ratification of > Unclear contract clauses leadmg to limited recourse and high tradmg nskinternationalconventionsRegulated tariffs > Uncontrolled cross-subsidies leadmg to misallocation of resourcespreventing propermarketing and strategy

Port Limited incentive for > Very high tanffsAow quality of services compared to neighboring countriescompetition

Freight Little or no door to door > Most nsky leg of the tnp goes umnsuredforwarding service available

Weak transport >. Significant idle time along the transport chammanagement >' Inability to bring products to well functioning markets (agnculture)

Insurance High pilferage > Increased msurance cost (by I to 3 percent of the value of msured goods)Mandatory use of a > Increased msurance cost by I percent of value of insured exportslocal intermediaryFragmented local > Insurance not always available or reliablemsurance

Banking Currency restnctions > Restricted access and use of foreign currencies make trade more costlyLrmted Banking > High interest rates and limited credit availabilityServices

A. Barriers to Active Competition

Competition has suffered from different rules, entry restrictions for foreign public andprivate operators, acceptance of monopolies and imposition of discriminatory rules for foreignoperators/investors These translate into increased costs and lack of services critical forinternational competitiveness. Just as competition in trade support services in the rest of theworld has been the major thrust for lowering prices and improving quality, its absence has had theopposite effect.

19 daily cost of a ship US$5,000- 20,000 and of a truck US$200-800

10

Unfair Competition. The development of fair competitive practices requires identicalconditions of operation for all parties Government-owned operators commonly undervalue their-assets, which enables them to charge rates below full cost recovery, introducing implicit subsidiesto public operators. Controlled prices and the lack of bankruptcy laws or their enforcement, andthe acceptance of continued operation of loss-making public companies, exacerbate the situationAlternatively, uncompensated public service obligations may create an additional burden, asoperators set up cross-subsidies

Lack of Anti-Monopoly Mechanisms. The absence of properly enforced anti-monopolyregulation endangers competition throughout ECA. This is especially true for fixed facilities suchas ports, where non-transparency and strong insider pressure during privatization have led to thecreation of private monopolies. State monopolies have sometimes been maintained by entrenchedinterest groups, which may extract substantial rents from these arrangements

Discrimination Against lForeign (ODperators. Discriminations against. foreign serviceproviders have taken different forms ranging from non-recognition of foreign permits to hightransit fees for foreign transport providers at the border. Bilateral quotas from Europeancountries also tend to limit the possibilities for ECA operators to operate in the EU. In theinsurance sector, the mandatory use of local insurance intermediaries is another example ofdiscrimination. Discrimination reflects Government fear that local companies may beoverwhelmed by more advanced or cheaper foreign operators and may lose existing rents. Thisimplicitly values the GDP share of protected companies above the much greater benefits thatresult from improved performance of the whole economy in the global market.

B. BaMers to 0peradons

Various physical, legal and regulatory barriers have hindered operations. These aretypically: (i) unstable, incomplete and unclear legal environment for investments and operations;(ii) incomplete international integration; (iii) absence of internationally accepted tradingconditions; (iv) price controls; (v) border crossing delays and cumbersome customs procedures,(vi) inadequate infrastructure financing schemes; and (vii) limited recourse againstharassment/lawlessness.

Legal and ReguRatory Framework instability. Legal and regulatory frameworks havechanged very rapidly in ECA countries without clear pre-announced staternent of purpose.Service providers have had difficulty obtaining the complete range of laws and regulationsapplicable to their operations. A recent review of laws in Georgia revealed that no single sourcewas capable of providing copies of all regulations applicable to transport operations. Involvementof the private sector in services previously handled by state-owned entities such as freightforwarding, warehousing, insurance, freight consolidation, encountered some legal gaps exposingoperators to high potential liabilities incompatible with international practice. The instability andlack of clarity have confronted operators and investors with uncertain cost structures and marketpotentials Unclear regulations prevent reliable delivery of goods and limit the creation of jointventures. Transfer of advanced know-how in trade support services is consequently delayed.

I1

Incomplete International Integration. Standard legal and regulatory foundations forinternational trade have not yet been recognized everywhere The contract of carriage, the_liability of the carrier, the framework for complaints and claims and the validity of contracts wereonly covered partially in the FSU Civil Code, still in use in some countries In particular, liabilityissues in multi-modal transport are not covered The use of sales contract based on theINCOTERMS20 has not been defined in the legal and regulatory framework of all ECA countriesThe absence of legal definitions applicable to trade is in conflict with the private sector concern toensure: (i) contract enforceability; (ii) claims handling capability; (iii) liability for timely delivery;and (iv) availability of reliable third-party contractors in logistic operations. Restrictions oncapital flows, financial services and insurance further affect trade by preventing the use ofstandard credit facilities and insurance.

Price Controls. Price controls set up by governments limit the development of responsivetrade support services. Price controls have been significant in Group III countries in the railwayand port sectors, for which tariffs are decided at the level of the Ministry of Transport. Althoughsometimes well intentioned, price controls entail distortions in productivity and services,introduction of subsidies affecting efficient companies and benefiting less efficient ones, and theinability for everyone to have the flexibility to provide customer-driven services at their real cost.

Customs/Border Crossing. A major barrier to trade comes from unclear, changing, andlengthy customs and border-crossing procedures, as demonstrated by long lines of queuing trucksat border-crossing points This barrier has both a large direct cost (truck and cargo standing idle)and a significant indirect cost (foregone export opportunities due to unreliable lead times).Vested interests, weak human resource management, and lack of information technology andinfrastructure combine at the core of the problem The extension of the Schengen Agreement2l asthe first ECA countries access the EU, will create additional pressures to upgrade facilities andinstitutions to EU standards

Cost Recovery The cost of transport services has been increased substantially by thepoor condition of transport infrastructure and the limited level of maintenance provided since1991. The condition is strongly related to the unsustainable financing arrangements, which do notrecover the user costs for existing infrastructure.

Weak Recourse. Effective recourse of operators against harassment by public officialshas been limited or nonexistent in many instances. Weak judiciary and enforcement systems areoften the main reason For example: operators are helpless when faced with harassment resultingin costly delays at border crossings, and protection services need to accompany shipments eithercross country or up to destinations. Unclear regulations and impossibility of raising claimsfacilitate rent-seeking behavior.

20 INCOTERMS: standard International Commerce Terms defining main charactenstics of a sale contract(delivery, risk of loss, insurance, transportation, import/export formalities)

21 Agreement allowing for the free flow of goods and individuals across its signatones.

12

m. THE RoAD AHEAD

This section describes the nature of the measures required to create an environmentfavorable to the expansion of trade support services. The actual implementation needs to betailored to each country context, keeping in mind that most countries have already started andsome Group I and Group II countries can already claim significant success.

Success in creating an enabling environment for trade support services depends to a greatextent on the ability to maximize the number of new entrants and foster intensive competition inthe provision of these services, ensuring timely innovation and introduction of supporttechnologies. The perception of profit potential and easiness of operations for new entrants areinfluenced by four main parameters . (a) the availability of information (trade volumes, tariffs,services offered, regulations and laws applicable) and training; (b) the fairness of competition, (c)the right to act independently; (d) the appropriateness of the legal and regulatory framework fortrade.

A. Availability of InformaDion

Dissemination of [nllnformation. Governments need to facilitate the dissemination ofinformation to reduce the perception of risk amongst investors. In a global competitiveenvironment, knowledge is power. The attraction of new entrants depends to a large extent onthe quantity and quality of information available. The absence of information deters investors Inthe case of trade support services, the following would be of interest: trade and traffic volumes,tariffs and services offered by existing service providers, government policies, all regulations andlaws applicable to investment, provision of services or capital flow management, and existingrecourse mechanisms. This dissemination could be initiated by the Government until associationsare sufficiently developed to assume the responsibility22 . In particular, Government policy shouldencourage the expansion of independent associations to monitor and rate the reliability of existingservice providers.

22 The case of Pro-Chile in the '70s and '80s and its later replacement by private imtiatives is an example of thisfunction In addition, a collection of best practices in supply chain management in under preparation as a separatestudy at the Bank in TWUTD.

13

Improving the Provision of Information.

ITarget Group: traders, investors, trade support service providers, government, customs adminstration.

!Medium : internet web site with push technology and email notification; CD-Rom.

i Countries included: all countries willing to join (little additional cost once it is designed)

;Information available in local language, English and other languages: all applicable laws and regulations,;suggested amendments in the legal and regulatory framework, names of government officials dealing with specific;

;issues; customs requirements and tanffs, trade statistics and characteristics, trade support services offered by the;jvanous providers, service pnce and reliability adjusted in real time, list of difficulties faced by shippers, companies;;looking for partnership; distribution networks in the country, list of critical contacts; prices of goods and services,in the country; applicable metrology, standards, testing and quality.

Incentive for private sector: the system would allow them to advertise their services intemationally and provide!!feedback to changes proposed in the legal and regulatory framework by the Government.Incentive for public sector: more entrants in the sector, increased revenue and transparency.

Training. Raising the quality of corporate governance will require some massive trainingefforts in relatively new fields. Substantial training has already been received in ECA countriesunder grant financing arrangements (Phare, TACIS), under the auspices of Government orprofessional associations. The creation of logistic training centers in Hungary has proven asuccessful initiative to raise awareness and introduce international know-how in trade supportservices The active involvement of trade associations and chambers of industry and commercepartially explains this success.

B. Fairness of Competition

The stimulation of competition requires: the completion of the privatization of governmentowned operators; free entry to the sector; the regulation/concession of remaining state-ownedinfrastructure; the removal of protectionist policies; the elimination of discriminatory taxes orrules, updated bankruptcy laws; enforcement of competition and anti-trust laws; and consumerprotection

Change in State's Role. A fair competitive environment requires first a transformation ofthe Government involvement. Successful efforts in that direction worldwide indicate theeffectiveness of reducing the operational role of the State by (i) commercializing infrastructureand privatizing operations (Box 6); (ii) reducing financial loss by imposing cost-recoverymechanism; (iii) strengthening policy making and implementation of laws and regulations; and (iv)introducing market monitoring, and restricting state intervention to situations of structural crises.All this applies particularly to the provision of transport services

Free Entry/Exit. Licensing, where it exists, should be limited to ensuring the financialstanding, professional competence, and quality of the licensee, and proper handling by operatorsof environmental issues and impacts on third parties, ideally without resorting to quotas Forexample, licensing requirements in road transport would include guidelines for domestic noise andexhaust emission standards, compulsory vehicle inspection requirement, compulsory third-party

14

insurance and proper driver-licensing and driving hours requirements. If international quotas doexist, the licenses should be auctioned or randomly assigned to avoid discretionary decisions A-staged implementation of EU safety and environmental standards should be outlined in eachcountry following detailed economic analyses. The quality of services should preferably bemonitored by independent associations affiliated to international associations, e.g. the FIATA 23

for freight forwarders or IRU in the road sector.

Preventing Private Monopolies. Preventing the creation of monopolies is a criticalsurveillance function in a market economy. The legal and regulatory framework shouldspecifically eradicate any advantages under the law for existing companies compared to newentrants and prevent monopoly-inducing situations. The legal and regulatory framework shouldallow free entry and ensure that term concessions are openly retendered at the end of their term.Furthermore the opening of the economy to trade and international competition strengthensmonopoly prevention measures

Removal of Protectionism. Local and foreign operators should be allowed to operateand compete on a similar basis The cost of protectionism has proven very high (Box 7).Discriminatory taxes or procedures targeted against foreign operators should be removed. Thesignature of a multilateral agreement in Baku (Box 8) committing countries at a political level toeliminate protectionist measures on international transport for the development of the Europe-Caucasus-Asia corridor is a move in the right direction.

Box 6. Privatization Methods Box 7. The Cost of Ibtervention: Maritime Transport Flag Protection.

The transfer of enterprises from the The policy to preserv¢ transport rights for national carriers has proven costlyState to the private sector could take both in tenms of selvice cost (30 % higher cost than in a competitiveplace by any of the following environment) and inpact on the balance of payments due to the foreignmethods: (i) sale of assets; (ii) sale on exchange mtensity ofl maritime operations.- In a study of Venezuela, freighta turnkey basis by auction; (iii} rates were found to be about 30 % above free-market rates. On annual freightliquidation; (iv) partial sales of expenditures of US$800 million, the excess cost to the economy was US$290ancillary services; (v) conversion into million. Since 70 percent of the freight payments were to foreign carriers, thea stock company with sale of shares; extra foreign exchange cost was US$190 mission. rhe balance of payment(vi) sales on credit to employees, (vii) contribution from reserved cargo, once allowance was made for all inputscontracting of supervisory or control purchased abroad, was only US$20 million. Losses were therefore 9 4 timesfunctions (such as pollution control). as high as gains. Lois/gain ratios for other developing countries were BrazilExistence of freedom of entry has 7 4, India 4.3, Philippines 6.1 and Turkey 9 2.proven cntical for the transfer of Ioperatlons to the pnvate sector. Source Messerlin P. and al. 1990. The Uruguay Round Services in the World

Economy.

23 FIATA International Federation of Freight Forwarders.

15

Box 8. Multilateral Agreement on International Transport

In an effort to rebuild the Silk Route trade, UNCTADIUNDP have launched a Central Asian Trade, Transitand Transport Initiative. This initiative indudes the preparation of a.multi-country Transit TransportFramework. The framework grants the right of transit to each of the contracting parties to facilitatemovements of goods, luggage and passengers and provide all possible facilities for interstate and transittransport. In particular, the parties commit to: eliminate unnecessary delays; minimize the incidence ofcustoms fraud or tax evasion; and bring about simplification and harmonization of customs procedures andadministrative documentation. To reduce unnecessary delays, the contracting parties undertake to establishjoint frontier points to prevent repeated unloading and reloading, ensure that adequate manpower resourcesare present, coordinate working hours of adjacent frontier posts, and provide communication and parkingfacilities to transport operators. The agreement defines the general conditions of road, rail and inlandwaterway transport, the scope of the contract of carriage and the conventions to adhere to.

C. The Right to Act IndependentlyThe efficiency of a market economy comes from private companies freely allocating

resources to offer services that their customers are willing to purchase The introduction ofregulations other than those related to safety, environment, information or competitionpromotion, goes against this fundamental principle and reduces market efficiency. Deregulationgenerates higher growth as demonstrated in the United States and in the United Kingdomcompared to the rest of Europe. Price and labor-market deregulation in ECA would also fosterthe development of trade support services.

The increasing complexity of trade support services, and the need to adjust the mix ofservices and tariffs to client needs, require great flexibility from private companies and minimuminterference from Government in pricing the services. Examples of quick turnaround ofoperations after deregulation/privatization abound and demonstrate that the type of trade supportservices depend at least as much on government policies as on the type of infrastructure/assetsavailable (box 9).

Box 9. Chile: Turnaround of the Port' Sector.

Chjlean ports in 1973 were a serious impediment to international trade. Long dwell time in ports, poor quality ofservice, excessive cost of manpower. (four times normal rates), loss making (income covering 8 percent of the StatePort Company's expenses), diversion of cargo, hugh insurance cost and repute for being the dirtiest ports in theregion were the main symptoms. The union of longshoremen was at the core of the issue, by imposing highsalaries, inflexible work rules (eg., no work with artificial light) and low productivity levels. Longshoremen weregranted life-long irrevocable permits. Little could be achueved against this de facto monopoly. Port capacityimprovement under these conditions required very large infrastructure investments, which were even considered asa possible project by the World Bank at one point.Change took place over the next ten years as representatives of -the economic sectors were nominated to themanaging board of the state company. The longshoremen pernits were bought for US$50 million, and the unionpnvatized, i.e., became a stevedoring enterprise in a competitive environment The tariff system was transformedto provide the incentives for quick turnaround. Unrelated activities ceased, unnecessary assets were sold, staff levelwas reduced by 80 percent, work shifts covered 24 hours a day instead of daylight time only. The results wereoutstanding: profitability was reestablished (greater than 5 percent on investment), port capacity increased tenfoldwith only lnlited investment in infrastructure, and productivity and real wages increased. The development ofChilean trade was partially due to this transformation of the port sub-sector.Source: Carlos Silva, ex Minister of Transport of Chile.

16

D. Appropriateness of Legal Framework

The "appropriate" legal framework is the collection of laws, decrees and regulations layingdown foundations compatible with international (WTO) and regional practices (EU, APEC...)for: trade exchanges; transport; Information Technology development; and border-crossingoperations.

Defining Trade Elements. Three basic elements are required for any trade exchange: thecontract of carriage (Box 10) that permits the seller to get out of the transportation business; thecontract of sale (Box 11) that permits the seller and buyer to deal at a distance; and creditfacilities that permit seller and buyer to deal with credit risk. These elements should be urgentlydefined to bring the liability and insurance requirements of trade support services providers tointernational standards, especially in regard to: (i) multimodal transport, (ii) contractual liabilityfor goods in transit; and (iii) electronic commerce. Accepted international standards, such asINCOTERMS for contract of sale or the FIATA Bill of Lading, should be adopted andrecognized. The European Union promotes such recognition in the ECA region under itsTRACECA, EU-PHARE and TACIS programs.

Insurance and Banking. Use of credit facilities and insurance is an integral part of anytrade An appropriate environment for trade includes strengthened financial and insurance sectorregulations, reinforced central banks' inspection capacity, privatized financial institutions, efficientfinancial and insurance markets, and free access by foreign companies. These are required toensure the availability at reasonable cost of widely used transaction tools, such as documentaryLetter of Credit, documentary collection or buyer credit enhancement instruments

Convergence with EU/Compatibility with WTO. Laws and policies affecting tradesupport services should become progressively compatible within geographical regions, i.e, withthe EU practice especially for countries in Group I and II. The legal and regulatory frameworksshould converge in regard to the liability of operators in the provision of their services,requirement of compulsory insurance for third party damage, minimum safety and maximumpollution regulations for operations, procedures for hazardous material transportation, andapplicable user charges. Whenever they are possible, similar frameworks across neighboringcountries reduce difficulties at border crossings.

17

Box 10. Contract of Carriage. Box 11. Contract of Sale.

The contract of carriage enables the seller to outsource the Contract of sale covers commercial andprovision of transport services by chartering a ship or legal/regulatory matters. Commercial aspectscontracting for transportation usimg a Bill of Lading. The Bill relate to: quantity, quality, price of goods,of Lading (BoL) is the document issued by a camer to a shipper responsibility for transportation, insurance,acknowledging receipt of goods, and stating the point of pick-up export/import formalities, and allocation ofand delivery, value declared for carriage, freight charges and risk of loss and credit. The Internationalterms and conditions of transport. The BoL evidences the right Commerce Terms (INCOTERMS) defineof possession of goods, and can be negotiable (deliver to bearer various types of standard sale contracts, andor order). As such, the rights of prior owners are limited and facilitate a common understanding ofthe BoL document needs to be transported physically. The responsibilities and liabilities The contractFIATA Bill of Lading, if adopted and recognized, facilitates form will allow the trading parties to selectinternatuonal exchanges. The use of faxable nonnegotiable freely the applicable Governing Law, such astransport documents (sea waybills) can help speeding the 'the Vienna Convention on International Sale ofprocess and is commonly used in the EU and North Ameenca, Goods with the law of the State of New York tountil electronic BoL transfer becomes common place. fill the gaps.

Facilitating Information Technology for Trade. A strong private-public partnership is

required whereby the private sector provides flexible services and the government the legal andregulatory framework conducive to competition in telecommunications. The provision of

advanced communication technology enabling speedy electronic transmission of insurance

contracts, payment orders or other documentation has proven critical in the success of trade-oriented countries. The Electronic Data Interchange For Administration, Commerce andTransport -- EDIFACT -- has made significant progress in Europe, and the UNCTAD-sponsored

system, ASYCUDA, has streamlined the time required for customs clearance. The emergence of

Internet-based solutions2 4 supported by UNCEFACT will soon offer the opportunity of integrating

small and medium enterprises in global supply chains. A clear policy is required in this field to

develop regionally compatible systems between the private and public authorities that will enablethe transfer of trade-related information throughout the trade chain. Various approaches arepossible2 5 including the provision of interface services by private operators

Streamlining Customs/Border Crossing. The cost of cross-border movements can beminimized with the adoption of standard international transport and trade documents, the

reengineering of customs clearance processes (Box 12), the design of quality standards for goods

and the enforcement of these standards. The improvement of border crossings requires the

harmonization of country regulations and procedures with international customs conventions,

notably the TIR convention and the International Convention on Harmonization of Frontier

Control of Goods The introduction of EU/UN lay-out-key documentation would simplify and

shorten the registration for Full Container Load/ Less Than Truck Load or Full Truck Load. Aregistry of forwarding companies, displaying past performance, would enable clients to identifygood performance. The transformation of customs should draw upon existing examples of

24 See www worldbank org/devforumlcurrent-edi html25 See Information Technology and National Trade Facilitation. A Guide to Best Practice, WTP # 317

18

customs reforms, e g, that descnbed in Box 13, and the customs collection action plan objectivefor APEC shown in Annex 3

Recourse System. A recourse system to handle trade-related claims and determinecompensation level is necessary Companies need the guarantee of protection against harassmentfrom rent seekers including civil servants such as customs officials, with the guarantee that eachcomplaint would be processed quickly, according to known rules This mecharnsm, coupled withnecessary judiciary reforms would limit the nsks perceived by the operators, and could befinanced by some user charges

Box 12. Reengineering Customs Box 13. Mexico Customs Reforms.Processes.

Follovwng the opemng of the Mexcan economy in the late 8Os, theReengineenng customs clearance customs administration was identified as an impediment to efficient tradeprocesses consists of developing flows In 1989, the Government decided to remedy the situation,new procedures and simphfytng stnppmg the Directorate General of Customs of its prerogatives,the existing ones Some innovative decentralizing customs administration, professional profiling andcargo clearance procedures replacing part of the existing staff, widely publishing the nghts andinciuding pre-learance, advance obligations of traders and customs, instructing payments to be madeof bonded shipments, selective directly to commercial banks rather than to customs officialsinspection, or use of customsbroker intermediaries, and Widespread computenzation and electronic data linkages are thecustoms/ shipper information backbone of the new system A computer-generated random selectioninterfaces, whlch are simple, process determines the transactions to be inspected to remove discretionnumnuze redundant data entry, and negotiability from customs officers Clearance steps have been cutcomply with international "best from twelve to four. Customs clearance are now camed out at the borderpractice", and considerably reduce or at an mtenor site withm the junsdicaon of the trader's office Entry tothe time required for customs the previously tightly controlled brokers segment has been liberalized andclearance. The simplification of the regulated fee structure was phased out and replaced by competitive;customs tarffs and valuation determunation of fee levels. The remaimng customs personnel benefitprocedures and reduction in the from an official incentive scheme whereby they receive bonuses for'number of commodity descnptions meeting predetermined productivity levelsand detailed schedule applicationswould linut the need for refined The immediate impact of these reform measures has been substantial Adeterminations of cargo value and World Bank survey assessed first year cost savings at US$2 billion or 5 %the interpretative latitude left to of the total merchandise trade in 1989, or close to I % of GDP Thesecustoms officials savings resulted from an average 3-day reduction in transit time, lower

broker fees and elimination of "undocumented expenses"' that used torepresent 70 % of brokers fees In addition daily collections of customsduties increased between 12 and 15 %

Source Ron Kopick:, World Bank Source. Hans J Peters, Promoting Latin America tv Trade

Stability of the Legal and Regulatory Framework. The stability, simplification andclarnty of the framework are prerequisites for the development of private sector activities andforeign direct investments Stability requires that a majonty of political forces share a vision ofthe needed restructuring Simplification aspects should be implemented in close cooperation with

19

the private sector. To some extent, logistic centers established in some countries in ECA weremade possible by positive regulatory surroundings, which attracted necessary irivestments

IV. CHANGE AGENDA/BANK ASSISTANCE

A. An Agenda for Change

The enhancement of trade support services and reduction of distribution costs in ECArequire (a) the redefinition of the role of the government, (b) efforts to raise awareness and buildpublic-private-international partnerships; and (c) the formulation of an enabling environment Adetailed list of possible actions by main type of issue is provided in Annex 1. The Bank'sexperience in transport and trade facilitation is presented in Box 14.

Thus, a change agenda for ECA begins to emerge in terms of three fundamental directionsof reform

a) Redefinition of the Role of the Government* Commercialize infrastructure management, withdraw from operations and increase

reliance on private sector* Strengthen government's institutional capability to formulate policies and enforce

legal and regulatory frameworks.

b) Awareness and Development of Public-Private-International PartnershipsNationally:• Ensure provision of training in logistics.* Facilitate emergence of local affiliations to international associations (IRU, UIC. )

to certify quality, advertise, offer human resource training.* Strengthen Public-Private Partnership in preparation of new legal and regulatory

framework.* Ensure availability of information on legal and regulatory frameworks and business

opportunities.* Establish recourse system for users against abuse of power.

Internationally and Regionally:* Strengthen international convergence of legal and regulatory frameworks* Ensure compatibility with international practice.. Select and adopt internationally accepted standards for communications and

electronic data transfer.

c) An Enabling Environment for the Development of Trade Support Services:* Complete trade-related legislation: definition of liability, contract of carriage, sales

contract, financial transactions schemes according to international commercialstandards and trade practices.

20

* Draft missing rcgulations (e g on market access, licensing of transport operators,third party interest regulations (safety, liability, user charges) and a sencs oftransport laws (Annex 1)

* Deregulatc to ensure fair competition, fair and equal entry and independentoperations

* Streamline and reform customs operations on the basis of the Kyoto Convention,WTO Agreements and other intemational practices

* Facilitate regional economic integration

B. Possible Bank Assistance

The portfolio of Bank projects and surveys developed since 1976 (Box 14) to supporttradc development is divcrse in nature and includes (i) sector projects focusing on transportlogistics or on specific bottlenecks, (ii) macroeconomic approaches in Structural AdjustmentLoans focusing on export finance, market and pnce liberalization, specific tax and tanff reformsand the overall regulatory framework for Trade Support Services, (iii) studies dealing with issuessuch as trade facilitation and transport logistics, and (iv) competitiveness projects that explicitlytarget trade facilitation, export development, or goods and services market development

Box 14. The World Bank Experience (19761998).

Plhase 1 (1976-1985) Signlficant sctor work on corridor cconornics, logistics and facihtation started in l,anAmerica in 1976 and in AfInca Soinc transport facilitaton projects were devloped highlighting the cornplcxfy oftrade facilitation cutting across sectors and changing cnvironments The Bank program review (I987) assessoclprogress to date as not cncouraging and dretv the following lessons (i) the Bank should promotc intcr inodaloperaibons, pnvate sector d%olopment, ceation of an enabling environment, increasing opcrational efficincnyparticipation in international and regional agmcrmnts, (i) given tle cross-sector complexity ofr faciliLation, lAiRank should adopt a long-term approach with successivc projcts, realistc goals, nsk analsis and fall-backStLratglCs, (II:) high ILeveI Of Cormneit coimitment is needed, (iv) if pan of SALs, program should bc rrncicrealistc, more flexiblc, assCss bctter tie vnllmpgss and capability of borroces, (v) too much focus on invcstIcrItoan the Bank side, (vi) such programs/projcxts are important yet complexPhase Il (1985-1992) Mostly isolated trade facilitation components focusing on Governance reform wereincr6asingly included in structural adiustmnet loans A second review (1992) focusing on trnsit trffic facilitationin Sub-Saliaran Africa suggusted the ned to. intor alba (i) integrato faciltation in a wildr pcrspective thantransport proects to cover pollqc dialogue, (xi) the pn% ahtnon of parastatal agencies and removal of instituionalharners, (iii) incrcased staff trining The impact of sevice industry and infrastructure managcmLnt was Firstasscssed in Indta in 1989Phasc l1 (1992-i998) New typcs of projets adopting a nder approach to trade facilitation wcre dcelopcd viltlproportionally more tcchncal assistance than investments, more private participation, art emphasis on thlL SeIriCescclor and a strong conrrUTmuint from the Gavemncat The Tradc and Transport Facillalion GwIdfiul2s(l3ank/UNCTAD reparl) descnbed a niultidscplinary clement approach to declop regional tradC and MUloi-rnodaliransport s)stems Such an approachl should include (i) the developmcnt of regulatory mcasures to haroroum

transport liabilLt) reg&mcs and insurance practccs, and to provide an appropriat legal fraracvoxk aniddcx lopGMent of marin-modal traniport operators, (ix) tradc and transport facilitaton mcasures and tlhe accCptr'acLby the tradirg co uirmlty, transport operators, governmLnt agencies, banks, and inwsrance companics, (in)dei clopment of pol tc) measures for smooth dzvelopmcnt of transport scmccs, as woll as to address nusnllocationof resources, and (iv) nays of fostenng, on a sub-regional level, iamoohzation and integrataon among acions bythe dlffecrent national actors The Bank has not yet analyzed the impact of these projects since most are underimphenteatationBased an If Ti' 316 Informahton TchnotoV and Aational Trade Facilitataon

21

The accumulated experience indicates that achieving the full benefits of trade facilitationrequires a wide multi-sector perspective in close cooperation between various units at the Bank,_and with other intemational organizations (UNCTAD, UNDP, WTO, IMF, EU, UNECE, ECMT,IRU, UIC ) throughout the project cycle. The Bank in the past eight years prepared projects forthe development of trade support services in five main areas (see Table 1). The Bankreorganization around the concept of country clients opens an opportunity to address these multi-sector issues and share with ECA Governments, via the country units, a vision of critical reformsrequired, based on the experience of other countries Without this shared vision within theGovernment and the private sector, the Bank's actions in developing trade support services canhave only very limited impact. This multi-sector approach would benefit greatly from enhancedcoordination at a regional level to harmonize systems in place.

Table 1 Examples of Components Found in World Bank Projects (1990-1998)

The Transport The Governance The Financial. The Management The CommunicationDimension Dimension Dimension Dimension Dimension

Port modermization Metrology Sublending to private Technical assistance Implementation ofHighway sector Standards entities involved in in inventory new customs systemsImprovements Calibration marketing, trade management Framework forRailways Quality and distrbution26 Technical assistance development of

modernization Deregulation of prices Improving export in cost accounting teleportsIntermodal Liberalization of finance27 Technical assistance applications of

coordination trade Reforming access to in business electronic dataReform of shipping Rationalization of Foreign currency logistics practices interchange (EDI)Industry taxes and tariffs Container companyFacilitation for Rationalization of creation

container public expenditure Inland Containercompames Improving Depot creation

Development of commercialfreight forwarding legal framework

Reformmg customsprocedures

Based on this experience, the Bank's possible assistance would have the followingobjectives

(i) raising the awareness of its client on the need for change;

(ii) providing technical support in the change process;

(iii) removing existing infrastructure or information technology bottlenecks,

(iv) facilitating access to financial instruments; and

(v) supporting wide regional initiatives

26 Hungary Product Market Dcvelopment Project.27 Jordan Export Development Project

22

Raising Awareness. The awareness process can start with the preparation of TransportSector Reviews (Annex 1, Box 15) or analytical reviews to identify existing weaknesses in-specific trade support services and make recommendations to reduce the costs of trade and bringthem to international levels. Depending on each situation, the study can be narrowed down to theanalysis of specific delivery chains. For instance, the Framework for an Efficient ContainerTransport System in China (Annex 1, Box 16) prepared as the joint effort of the ChineseGovernment and the World Bank assessed the country's container transport and borderprocedures, and identified solutions as a basis for a new project to generate cost and time savingsThe Bank can successfully help raise awareness by supporting institution building and promotinghuman resource development programs as illustrated in the case of the Hungary Product MarketDevelopment Project, which included the establishment of a Logistic Promotion Center (Annex 1,Box 17).

Providing Support. Provided that a vision of the changes needed is sbared with ourclients, the Bank can provide the needed technical support to assist in the change process. TheBank has had some success in providing technical support in cooperation with internationalpartners in institutional strengthening (Annex 1, Box 17 and 22), action plan formulation to createa trade enabling environment (Annex 1, Box 18) privatization, quality certification systems(Annex 1, Boxes 18 and 24), private public partnership development (Annex 1, Boxes 17 and 23),and introduction of EU-compatible regulations. The Bank has participated in customs reform(Annex 1, Box 16) in partnership with other institutions such as UNCTAD in Mauritius (Annex 1,Box 18), WTO in Jordan (Annex 1, Box 24) and the IMF in Macedonia (Annex 1, Box 19)

Projects recently approved or under preparation will attempt to address part of the changeagenda for trade support services development . the restructuring of the Ministry of Transportproject in Georgia, using a learning and innovation loan, will try to transform a traditional Sovietministerial structure into one attuned to new market economy requirements and capable offormulating an enabling framework (Annex 1, Box 20); and the Estonia Trade and TransportProject will finance the relevant components of a detailed action plan for trade support servicesdevelopment prepared by the Government with the assistance of the Bank (Annex 1, Box 21). Inaddition, the Bank could play a role in designing the tools required to provide information onavailable trade support services, on business opportunities, and on legal and regulatoryframework.

Removing lrnfrastructuere Bottlenecks. An often-tried approach at the Bank has beenfinancing the removal of existing bottlenecks in infrastructure and information technology.Maximizing the use of assets by maintaining existing ones, increasing productivity, and providingrequired equipment remains the priority compared to capacity expansion as illustrated by currentECA transport projects. The Bank's experience highlights that countries have tended to placetoo much emphasis on easier-to-manage large investments compared to technical assistance

23

Making Financing Available to the Private Sector. The Bank has successfully financedmicro infrastructure in India (Annex 1, Box 22) such as inland container depots, cargo handling_facilities, multi-modal transfer facilities, logistic information systems and equipment leasing tobuild the backbone of the distribution systems. The same approach is expected to take place inNepal (Annex 1, Box 23).

Careful project design is needed to prevent existing private operators suffering from thecompetition of new entrants benefiting from soft financing. The Bank has promoted in Mauritiusa Technology Diffusion Scheme with cost sharing with the private sector. Designed to be demandresponsive and to encourage private sector delivery of these services (Annex 1, Box 18), itprovides lines of credit to the private sector. The export development project in Jordan alsoexemplifies the use of credit lines (Annex 1, Box 24).

Where the banking system has been found to be a bottleneck to private sectordevelopment, the Bank has proposed some lines of credit to the banking sector that were on-lentto private parties for operational, marketing, or information technology improvement as interimsteps. Credit earmarking can lead to resource misallocation, so the Bank seeks to ensure that it isonly used in very special circumstances and is only in place for a limited time. The line of creditapproach has been tried successfully in Jordan (Annex 1, Box 24) and in Hungary (Annex 1, Box17). In the medium run, the lack of flexibility and the emergence of cheaper sources of financingas the financial sector reform took place removed the need for these facilities and limited theireffectiveness to the early transition period of the country's banking sector reform.

Support Broad Regional Initiatives A major strength of the Bank comes from itsinternational presence and its dialogue at the highest level in member countries. The promotion ofregional initiatives would be attractive in trade support services, where the full range of projectbenefits are realized from the simultaneous adoption of improvements by several neighboringcountries.

Regional awareness in turn may be developed by means of workshops and symposiaorganized jointly with other international organizations to harmonize throughout the region thelegal and regulatory frameworks, and regular contacts among regional partners. Some newprojects in support of South Asia Initiative or the South European Cooperation Initiative will testthis significantly more ambitious approach.

Conclusion. The Bank has a key role to play in the complex and vast change agenda forthe development of trade support services (see Table 2) Coordination, a shared vision andleadership are essential to tackle the multi-sector dimension and the large number of partiesinvolved. Enhanced knowledge management within the Bank dealing with the specifics of tradesupport services will be the most valuable asset on which to base the Bank's interventions in thisfield. Efforts launched at the level of the Port, Railway, Airports and Logistic network to monitorlogistic performance worldwide, cooperate with critical associations (ICC), organizations, andprivate and public parties, move the Bank closer to assuming this coordination and knowledge-sharing role. Further review of developments in Information Technologies for Trade Support

24

Services is underway and will attempt to capitalize on existing knowledge among Bank staff andoutside groups.

Table 2: Nature of World Bank Assistance to Trade Support Services in ,ECA

Objective ActionsRedefine the role of the C' Institutional reviews and human resource developmentGovernment 3 Institutional strengthening

a Maintenance and assets management improvemento Operational efficiency improvementD Pnvatization Processes

Raise Awareness and a Transport Sector ReviewsIncrease D Competitiveness and logistical chain analysis.Private/Publc/llntermational a Provision of technical assistance in supply chain managementPartnerships 0 Support of regional initiatives involving multiple international organizations in

designing projects in support of transit, trade facilitation or regional integration• Bulding up of private-public partnerships in the context of projects.• Introduction of EU-compatible regulations.• Building up of information systems.a Introduction of Metrology, Testing, Technical and Quality Standards

Formulate an Enabling D Formulation of Strategic and,Action PlansEnvironment " Technical Assistance

a Customs Reform (documentation, processes, structure).

Improve private sector access a Strengthening of financial sector regulations and Central Banks inspectionto financing. capacity

• Assistance in privatization of financial institutions and development of domesticfinancial markets

a Facilitation of market entry for foreign banks

o Dunng the transition, these aictions could be supplemented by:

a Providing lines of credit or guarantees to pnvate banks to finance trade andtransport facilitation projects

a Financing micro-infrastructure where private sector has not stepped inD Providing financing for information technology

25

Annex 1

Box 15. Transport Sector Reviews 1995-1997 (Belarus, Armenia, Moldova, Kazakhstan, Ukraine)

In addition to assessing the services and infrastructure available in each of the transport subsectors, the Moldova,Belarus, Armenia and Ukraine reviews described and quantified the transport and trade facilitation issues andmade recommendations to address them. The overall excess cost due to cumbersome procedures, inadequate legalframework, lack of harnonized documents, poorly developed services, unsafe conditions, and various controls wasestimated at 6 to 7 % of total trade transaction costs. The reviews included a set of recommendations (withassociated costs) to adopt appropriate transport legislation and international conventions, develop the insuranceand banking sector, streamline and improve customs procedures and export documentation, remove transportbarriers and stimulate the development of.pnvate sector services, and build up a freight-forwarding industry. TheUkraine Review was followed by a workshop, with broad public and private participation, which increasedawareness on the nature of the changes to be expected.

The Kazakhstan Review stressed the importance of (i) customs procedures improvement; (ii) facilitating entry tothe freight-fbrwarding industry and creating a national freight forwarders association; (iii) promoting competitionin the transport insurance market and ensurng access to foreign insurers; (iv) adhering to transit and internationalconventions and complementing them as needed by multilateral agreements.

Contacts: Pedro Taborga x34312, Jean Charles Crochet x31159, Gerald Ollivier x84023.

Box 16. China: Framework for an Efficient Container Transport System (1996) and Project (1998).

The Chinese State Economic and Trade Conunission and the World Bank initiated a one-year-and-a-half study toassess China's contatner transport and border procedures, and identify areas in need of improvement. The Bankdescribed its findings in a sector report (No. 15303-CI{A) describing the needs for, (i) redefining the Government'srole; (ii) developing container transport links; (iii) stimulating competition; (iv) improving border procedures, and(v) improving technology and facilities. A Containter Transport Project resulting from these findings is underpreparation to build up the operational and institutional capability for intermodal transport and would include: apilot inland distribution system, the formulation of a conducive policy framework and investments in InlandContainer Depots (ICD); port container handling equipment; and technical assistance.

Contacts Messrs. Shunso Tsukada x82953, Ronald Kopicki x36193.

26

Box 17. Hungary Product Market DYevelopment Project (1992)

Two aspects of this project deserve attention: the successful creation of a Logistics Promotion Center and theprovision of a credit line to the private sector.

he project preparation process included contacts by Bank staff with public officials, trade and industryrganizations, the management of selected key enterprises, service agencies and institutes of higher leaming.

Bank staff conducted workshops and semmnars for these parties to develop awareness and demonstrate best practicein logistic management. The independent Logistic Promotion Center created with the assistance of Dutchnancing has proved successfuI in : (i) raising awareness within the industry and trading communities of the

importance of effective logisfics organizations; (ii) facilitating expansion of logistic related traininig and education;(iii) advising trade and industry organization on logistics; and (iv) keeping spac with logistics internationalcommunity. Thanks in part to this initiative, Hungary stands now in the forefront of logistics in ECA.

A credit line of US$100 million was also included in this projet. The credit line was made available to theNational Bank of Hungary, with a view to passing it on to 10 local banks that were entitled to lend these funds for

rogects with dominant marketing or distribution components- About three hundred micro-projects with anaverage subloan size of about US$150,000 have been approved so far. While the institutional and policy objectivesof the project have largely been met, only about 50 percent of the loan has been utilized to date, since alternative,less expensive, more flexible financing has become available from other sources About US$ 35 million of theoriginal loan amount has been canceled.

Contacts: Ktshore ATadkarni, x32698, Hans Peters anfrastructure Note PST])

Box 18. Mauritius TA to Enhance CompetitOenness Project (1994)

This technical assistance Project.has four main objectives. (i) promoting modem technology through a TechnologyDiffusion Scheme designed to be demand responsive to encourage private-sector delivery of these services; (ii)strengthening the MSTQ2 infrastructure to improve export quity; (iii) facilitating trade through procedurestreamlining, documentation rationalizing, and promotion of an eiviromnent conducive to EDI adoption; and (iv)implementing economic and regulatory reforn as needed. Each ir the objectives has been mapped in a detailedaction plan with deadlines that drive the change process.

The project is an example of a new comprehensive approach tq, trade enhancement in developing countries inwhich infonnatics is a ctral component to efficiency improvenient, but not an isolated one. The project is theoutcome of an unusually receptive environment and a Bank assistance strategy targeted to stimulate exportdevelopment. It was built on a strong cross-sectoral participation of public entities and the private sector, whichhelped defiae the public services needed. The project benefited from the awareness raised by training on the needfor a new electronic trade facilitation system financed by the private sector. The EDI tbaining involvedrepresentatives from the customs and excise department, Ministry of Trade and Shipping, commercial banks,Mauritius Marine Authority, Air Kauritius, customs brotkerage firnns, and cleanng and forwarding agents.

Contact: Ahmef I. Soylemezoglu , x38 771

28 MSTQ : Metrology, Standards, Testing and Quality.

27

Box 19. Macedonia Transit Facilitation Projeet (1995)

The project funded US$1.7 mnillion for technical assistance and equipment to develop and iniplement a moderncustoms system and improve transit times. The technical assistance was carried out by the IME. Customsprocedures and information management are being modernized on the basis of a US Customs Agency Study; inline with EU border-crossing improvement program for Eastern Europe.. An Action Plan agreed with theGovernment during negotiations includes the institutional, legal, regulatory, and physical measures to be taken toimprove border crossing.

The main achievements include: (i) the introduction of the ASYCUDA computer system, (ii) the introduction of amodern valuation control system that enabled an estimated US$ 50 million in extra revenue in 1997 (20% of totalcustoms revenue), (iii) the introduction of an EU consistent customs law, providing the administration withadequate powers to control and tax goods, prevent and investigate frauds, and operate according to modernstandards, including direct trade input and electronic signature, and (iv) the presentation of a framework for thecustoms departnent reorganization to address needs resulting from the introduction of VAT.

Contact. Martha Pokorny, x38079

Box 20. Georgia Restructuring of the Ministry of Transport

The Bank will assist the Government in definxng solutions to address the contraction of the Government role, theselective decrease of employment levels, pay scale reform, the transformation of recruiting policies, training anddevelopment of key staff and instrumentation of the policy reform function itself. This experience has potentialvalue for wide ranging Civil Service Reform processes including customs services and the redefinition of the roleof the Government.

Contacts. Mirtha Pokorny, x38079; K4vt# Sethi x87558.

Box 21. Estonia Transport Project

Following a Transit Seminar in September 1997, and as part of the preparation of a new transport project forEstonia, the Bank advised .the Government of Estonia in formulating a strategy and action plan for trade supportservices. This action plan, prepared with broad public and private participation, will define priority remedialmeasures needed for the development of infrastructure and information technologies, leg and regulatoryframeworks, private sector and public institutions. From this action plan, the Govemment of Estonia and the Bankexpect to deternine the actions most appropriate for World Bank financing.

Contacts: Cesar, Queiroz x38053, Gerald Ollivier x84023,

28

Box 22. India Container Transport Logistics (1994)

This project is the outcome of a sector survey (no 8130-IN) camed out with close participation of relevantministes, transport operators and shippers The Govemment enacted several laws indicating its commitmentThe project objectives were to improve the institutional framework for efficient and competitve containertransport, to strengthen the performance of the largest Inland Contamer Depots and Container Freight Stations, ofthe state owned company, and to greatly improve the service level and capacity in the main corridors

The project is successful so far although delays in the procurement have not permutted all expected sercelevel and capacity targets to be reached yet As part of the project, a Memorandum of Understanding with theIndian Railways (IR) was signed giving higher prionty to container tran taffic, offerng fixed-schedule serceswith guaranteed transt time However, since the provision of new rolling stock is delayed, the IR is not yetoffienng such service Nonetheless, traffic grew substantially over forecasts, and round-tnp tirne of containersdecreased by 30 to 50 percent

None of the technical assistance offered by the Bank in the form of study tours was used The substantialtechmucal assistance financed by grant financing was only partially sucessful, with significant success in techmcaltraimng of operators but limited impact on marketing or management, due to delays in Technical Assistanceimplementation

An Action Plan for customs procedures and practices was agreed between the Bank and the governmentIt included temporay adnussion for contamers, acceptability of a bank guarantee for container transfer up to theinland depot, freedom of modal choice, twenty-four hour customs exarunation and clearance facility at four majorports Improvements under the customs program arc begmnnng to be felt at this stage, and highlight that customsreforns and the effects of new laws and regulations take time in a complex environment such as that of India Acomplete assessment of the project is under preparation and will provide quantification of the impacts to date.

Contacts Fabio Ca/li x8I$90, HaraldHansen, x81474

Box 23. Nepal Multimodal Transit and Trade Facilitation Project (10/1997)

The project's objectives are to (z) reduce transport costs associated with Nepal's imports and exports, (ii)streamline trade and transit procedures, and (iii) improve the efriciency and organization of transit tradedocumentation and data exchange

The Project will include (i) the construction, improvement, and rehabilitation of several Inland Container Depots(ICD) and provision of their eqwupment, (6i) installation of ASYCUDA, (iu) installation of the Advanced CargoInformation System, (iv) and technical assistance and tramning to simplify documents and procedures, modernzecarner's liability, imsurance provisions, and customs policies and procedures, strengthen freight forwarding andcustoms cleanng, and update foreign-curmn trade regulations

Contacts Fabio Gal/a, x8J89O, Harald Hansen x81474s _ 11 ... .j ; ;_ jj j ..... _ ...................... .......... ..... .. j_ | | .. ...... .. . .. .. ... .. I

29

Box 24. Export Development Project in Jordan (1996)

The project focuses on finance and export development based on the policy presented by the Jordanian Minister ofPlanning. The policy has four main objectives d (i) access to imports at international prices by reforming customsadministration, developing a trade facilitation system and liberalizing free trade zone regulations; (ii) mobilizingand enhancing investments; (iii) increased access to term finance; and (iv) improvement of product standards bystrengthening the metrology, standards, testing, and quality (MSTQ) infrastructure. The project consists of aUS$40 million line of credit onlent to six banks that onlent to private borrowers on average US$500,000 toenhance manufacturing, environmental protection, marketing arrangements or to finance incremental workingcapital needs.

The project is unusual in the wide participation within the country and the support of other multilateral agencies.Tlhe Government commitment is demonstrated by the new laws introduced (on customs, standards and metrology,income tax). The private sector contributed US$20 million to cover local expenditures of the project, underliningthe importance of participation for a successful program. The project ensured a close coordination withmultilateral agencies: (i) tax structure, customs administration framework and other administrative andenforcement procedures were coordinated with IlMF, (ii) MSTQ strategy was designed in coordination with theGATT and WTO; and (iii) ASYCUDA system will be installed with UNCTAD technical assistance.

The project introduces a substantial improvement in the level of information technology . ASYCUDA, an MSTQ-related information database/access system, a link to a quality management registration system, and a centralreference source on trade-related information are also under consideration.

Contact: Tufan Kolan x33234

Annex 2

Legal and Regulatory Framework: Typology of Priorities in ECA

These priorities should be adjusted following economic evaluation to reflect a country's situation and stage of development.

Critical Element Priorities Partners Selected Previous_Bank Actions/Projects

Customs a Classify traded goods using the standard international Eurocustoms, 1. Macedonia Transit Facilitationsystem for classification of goods (Harmonized System EU (TACIS, 2. Transport Sector ReviewsConvention), TRACECA, (TSR) for

o Make customs procedures transparent, PHARE), Belarus, Moldova and Armeniao Simplify customs procedures following Kyoto Convention, WCO IMF, 3. India Container Transporto Adopt WTO Valuation and Intellectual Property US Customs Logistics

Agreement, - Agency, 4 Jordan Export Developmento Introduce clear appeals provision, UNCTAD, 5. Nepal Multi-Shipment break-o Introduce advance classification ruling system, WTO, OECD, upmodal Transito Adopt WTO Agreement on Pre-shipment Inspection (SGS), SCCP, Others: Customs Administrationo Provide for temporary importation (ATA and Istanbul UJNECE : Strategy for Reform, IMF;

Conventions). SECI TRACECA Trade FacilitationProject

Trade and Transit o Ratify International Transit Conventions guaranteeing right UNCTAD Other Saraks AgreementConvention of transit and mutual recognition of permit/license, IJNDP, WTO, (TRACECA); Silk Road Transit

removing unnecessary delays, minimizing fraud, simplifying EU, Agreement (UNCTAD)and harmonizing procedures and legal framework (ex. Silk UNCEFACTRoad Initiative).

o Define priority itinerary and bonded facilities for transittraffLic

o Take cost recovery measures for use of transitinfrastructure

o Assess rationale and efficiency of import restrictionscompared to free access

Transport Sector * Develop EU-compatible transport policies to address weak EU, ECMT, 1. Transport Sector Reports formanagement, lack of maintenance, lack of financing, and UNCTAD Belarus, Moldova, Armenia,allow for intensive, free and fair competition, UNDP, Ukraine, Georgia, Kazakhstan.

. Harmonize (for EU accession countries) or approximate ICAO, IMO, 2. Estonia Trade and Transport(non EU accession countries) with EU Transport IRU, ProjectLegislation, UNCEFACT 3. China Container Transport

* Identify legal and regulatory inconsistencies, Services and Trade (No. 15303-. Make available all legislation from one source, CHA)* Create missing legislation/regulation 29 , 4 Nepal Multimodal Transit* Implement, translate into laws and procedures conventions

that have been adhered to and enforce these,* Develop corresponding licensing procedures to ensure

safety, environmental protection, and informationtransparency.

* Adhere to the convention on the Liability of Operators ofInternational Terminals (1991),

. Liberalize freight transport prices,* Enforce National Accounting and Auditing Standards in

accordance with International Accounting and AuditingStandards

* Enforce company registration system approximating EUsystems.

* Create a Trade Facilitation Commission..* Adopt fiscal policies/regulations compatible with EU

Cross * Ratify bilateral visa agreementsBorder/Visa

29 Cover inter alia (i) transport related warehousmg and storage, (ii) logistic related warehousing, storage and distnbution; (iii) broker activities, consolidations and shlpmentbreak-up activities,

Agreements

Road Transport Adhere to and apply: EU, IRU, 1. Estonia Trade and Transporto Convention on Road Traffic (1968) UNECE, Projecto Convention on Road signs and Signals (1968) ECMT 2. Transport Sector Reviewo Convention on Contract for International Carfiage of 3. Latvia Highway Project

Goods by road (CMR May 1956) and its 1978 protocol 4. Armenia Highway Projecto Customs Convention on the International Transport of

Goods under TIR carnet (TIR Convention 1975)o Customs Convention on the Temporary Importation of

Commercial Vehicles (1956) (carnet de passage)o Code on Transport of Dangerous Goods by Road (ADR,

1957) and its October 1993 protocolo Convention on the Harmonization of the Frontier Control

of Goods 1982o European Agreement on work of crews engaged in

international road transport (AETR 1970).Progressively introduce Road Charging policies aligned withEU legislation as much as possibleBecome member of IRU

Rail Transport o Adhere to COTIF/CIM Convention (Bern Convention, May EU, UIC, Bulgaria1980) ECMT Romania

e Become member of UIC and UIRRo Adopt European rail waybill

Maritime o (UN convention on Carriage of Goods by Sea (1978) IMO,MEPC, 1. Lithuania Klaipeda PortTransport (Hamburg rules)) IAPH, Project

o Adopt the International Safety Management Code (ISM) PIANC,o Sign the international treaty on oil pollution preparedness, ICHCA,AIVP

3 0 Legal Framework for Surface-borne Transport (Russian Federation)

response and cooperation (OPRC) (1990)* Sign and ratify Marpol and its protocol (1973/78)* Ratify the Memorandum of Paris on Port State Control

(1982)

Inland Waterway * Adopt regulations for navigation, crew work, transport of EU, ECMT,Transport dangerous goods and hazardous waste, internationally UJNECE,

accepted liability principles, Danube* Investigate the possibility to transform national waterway Commission,

into international waterways Rhine* Stimulate interagency cooperation Commission

Multimodal * Adopt a law on multimodal transport, EU, 1. China Framework for anTransport * Adhere to the Customs Convention on Containers (1972), FIATA,UIRR efficient container transport

* Adhere to the Convention on Safe Container (1972 CSC) system.* Adhere to a multimodal institution following the 2. India Container Transport

Convention on International Multimodal Transport of LogisticsGoods (1980), 3. Nepal Multimodal Transit

* Develop the use of FIATA Bill of Lading for Multimodal 4. Estonia Trade and TransportTransport (consignment note) based on ICC/UNCTAD Projectrules.

* Establish an independent combined transport operator andfacilitate its membership in UIRR

General Trading * Develop the use/understanding of INCOTERMS ICC 1. Estonia Trade and TransportConditions . Adhere to Vienna Convention on International Sales of Project

Goods (1980) 2. China Framework for anefficient container transportsystem.3. Transport Sector Reviews

Trade and * Introduce EU Single Administrative Document/UN Layout ICC, 1. China Framework for an

Transport Key with EU support UNCTAD, efficient container transportDocumentation * Introduce CMR Consignment Notes UNECE, EU system.

a Introduce UN Trade Data Element Directory (standardized 2. India Container Transportdata) Logistics

3. Nepal Multimodal Transit4. Estonia Trade and TransportProject

Teleprocessing o Tracking of Vehicles EU,o Electronic Fees INMARSAT,o Air Traffic Monitoring and Control systems ICAO, IATA,

EUROCONTROL

Information o Adoption of ASYCUDA3 ' UNCTAD/ 1. WTP 316 & 317 IT andTechnology o Adoption and support of EDI format and UN/EDIFACT32 UNECE, National Trade Facilitation

o Adoption of Advanced Cargo Information System ADB 2. Nepal Multimodal Transit andTrade Facilitation Project3. Mauritius: TA to enhancecompetitiveness Project4. Jordan Export PromotionProject

Metrology, e Provide information on foreign standards and certification ISO, EU 1. Jordan Export PromotionStandards, requirements ProjectTesting and e Create an institution guiding/certifying companies to obtain 2. Mauritius Project TA toQuality ISO 9000 series standards, enhance competitiveness

* Establish a calibration system,* Preparing product testing laboratory delivering international

31 ASYCUDA: Automated System for Customs Data; widely used customs management system developed by UNCTAD.32 UN electronic messaging format for automated system

accreditation

Registration * Introduce modern registration system to speed up customs EU 1. Estonia Trade and TransportSystem processing and put more emphasis on post control and Project

enforcement

Pollution Norms/ * Progressive harnonization with EU emission standards and EU, ECMT, 1. Second Roads Project,Externality control, fuel type, noise level, safety standards IRU UIC, Romania.Pricing . Cut back/eliminate competition-distorting subsidies in UIRR

freight transport

Banking/Monetar . Enact banking laws opening market access ICC, EU 1. Jordan Export Promotiony policies * Adoption of ICC commercial standards (Uniform Customs Project

and Practice for Documentary Credits, UCC 500) 2 Hungary Product Market Dvt* Review exchange controls and foreign currency regulations

in line with EU

Insurance * Revise the existing Civil Code section regarding transporter UNCTAD, 1. Nepal Multimodal TransitPractices/ Liability liability to conform to international practice of limited EU 2. Estonia Trade and Transport

liability (NSAB2000) Project. Enact laws for insurance of transport related risks

(Insurance Companies and Intermediaries)* Define insurance/liability practices for international

multimodal transport using UNCTAD Handbook forMultimodal Transport (1995)

. Introduce commonly used insurance practices (LondonInsurance Market Institute Cargo Clauses A, B and C)

* Create a free, non monopolistic insurance system

Forwarding * Registration of Freight Forwarders FIATA 1. China Framework for an* Organize a National Association of Freight Forwarders self- efficient container transport

regulating the profession (adhering to FIATA regulations system.and Code of Conduct) 2. India Container Transport

Logistics3. Nepal Multimodal Transit4 Estonia Trade and TransportProject

Information Create an information system giving access to all relevant EU 1. Jordan Export PromotionSystem regulations in force 33 (on CD-ROM and Internet) or market Project

information. 2. Mauritius Project TA3. Hungary Product Market Dvt.

Public-Private o Develop committees to improve the legal and regulatory ICC, EU, 1. Jordan Export PromotionPartnership framework adequacy UNECE Project

o Facilitate Chamber of Commerce Operations 2 Mauritius Project TAo Establish National Trade Facilitation Organs (public- 3. Hungary Product Market Dvt.

private) 34 4. Estonia Trade and TransportProject

33 TACIS is financmng such a database for the Russian Federation.34 UNECE, "National Facilitation Organs", Recommendation No 4, October 1974.

wi

37

Annex 3

Asia Pacific Economic Cooperation

Sub committee on Customs Procedures (SCCP)

Collective Action Plan Objectives 35

The Asia Pacific Economic Cooperation or APEC is a regional organization made up of 18member economies. It is designed to promote co-operation and growth as well as theliberalization and facilitation of trade and investment within the Asia-Pacific region. Each year,senior officials (SOM), working through committees, consider proposals and work programsbefore consideration by trade ministers and APEC leaders. The Philippines hosted APEC in 1996,Canada in 1997, and Malaysia in 1998.

Within APEC, the Sub-Cornmittee on Customs Procedures (SCCP) manages customs co-operation. The SCCP reports to the Committee on Trade and Investment and takes policydirection from the heads of customs of member economies. These people determine the strategicdirection for the customs work of APEC. In its Bogor Declaration, APEC has made free trade acenterpiece of its work, and it is relying on customs organizations to put in place the customsframework for liberalized trade. The following is the Collective Action Plan Objectives of theSCCP, and provide the broad framework for Customs international integration.

1. Harmonization of Tariff Structure with the HS ConventionTo ensure consistency of application, certainty and a level playing field for business through theHS Convention, the standard international harmonized system for the classification of goods.

2. Transparency of Customs Procedures, including Information on Customs Laws,Regulations, Administrative Guidelines, Procedures and RulingsTo ensure traders have all the pertinent inforrnation for business decisions through the provisionof accurate, consistent and user-friendly information.

3. Simplification and Harmonization on the Basis of the Kyoto ConventionTo improve efficiency in customs clearance and the delivery of goods,in order to benefitimporters, exporters and manufacturers through simplified customs procedures and bestpractices.

4. Adoption and Support for the UN/EDLFACTTo use the standard UN electronic messaging format for automated systems, the UnitedNations/Electronic Data Interchange for Administration, Commerce and Transport, to promotean electronic highway for business

35 Note: Business associations and enterprises are mvited to participate m work related to the above For moreinformation please consult the SCCP Home Page (http-//www.sccp.org), or contact the SCCP Chair or a local SCCP member

38

5. Adoption of the Principles of the WTO Valuation AgreementTo facilitate administration of the World Trade Organization's Valuation Agreement onstandard procedures for valuing goods.

6. Adoption of the Principles of the WTO Intellectual Property (TRIPS) AgreementTo implement border enforcement procedures for protecting intellectual property rights.

7. Introduction of Clear Appeals ProvisionTo provide business with an opportunity to challenge potentially erroneous or inequitableCustoms decisions through mechanisms for transparent, independent and timely appeals.

8. Introduction of an Advance Classification Ruling SystemTo establish simplified procedures for providing classification information prior to importation,thus bringing certainty and predictability to international trading and helping traders to makesound business decisions based on legally binding advice.

9. Provisions for Temporary Importation, e.g. according to the A.T.A. CarnetConvention or the Istanbul ConventionTo help business move goods such as commercial samples, professional equipment, tools oftrade and exhibition material across borders with a high degree of certainty as to how thesegoods will be treated by Customs by having standard procedures for admitting goods on atemporary basis.

10. Harmonized APEC Data ElementsTo develop a comprehensive directory supported in UN/EDIFACT which includes a simplified"core set" of data elements, largely derived from commercially available data that would satisfythe standard data requirements of the majority of APEC trade transactions and so facilitate theexchange of information and provide a foundation of common forms and electronic commerce.

11. Risk Management TechniquesTo focus Customs enforcement efforts on high-risk goods and travelers and facilitate themovement of low-risk shipments, through a flexible approach tailored to each APEC economy.

12. Guidelines on Express Consignments ClearanceTo implement principles contained in the WCO Guidelines on Express ConsignmentClearance, the international standard procedures for clearance of express goods, working inpartnership with express industry associations.

39

REFERENCES

World Bank, 1998, UKRAINE "Transport Sector Review", Report No. 1863 6-UA.

Hans J. Peters, The World Bank/International Finance Corporation, 1998 "Thailand's Trade andInfrastructure ".

IRU, 1998 "Handbook on the European Harmonization of Road Transport Legislation 2nd edition"

John Zysman and Andrew Schwartz, 1998, "Reunifying Europe in an Emerging WorldEconomy: Economic Heterogeneity, New Industrial Options and Political Choices".

World Bank, 1997, REPUBLIC OF ARMENIA "Transport Sector Review ", Vols., I, II and II,Report No. 16625AM.

Federal Ministry of Transport and Germany; Ministry of Transport and Communications ofFinland, 1997, "Barriers to Goods Transport Between East and West".

EBRD, 1996 and 1997 Transition Reports.

World Bank, 1996, CHINA "Container Transport Services and Trade: Frameworkfor anEfficient Container Transport System ", Report No. 1 5303 -CHA.

World Bank, 1996, Trade and Transport Facilitation: "Review of Current Issues and OperationalExperience " by Carlos F de Castro. A Joint World Bank/UNCTAD Publication. Working PaperNo. 27.

World Bank, 1995, BELARUS "Transport Sector Review, " Report No. 13808-BY.

World Bank, 1995, Information Technology and National Trade Facilitation 'Making the Most ofGlobal Trade " by Robert Schware and Paul Kimberley. Working Paper No. 316.

World Bank, 1995, Information Technology and National Trade Facilitation "Guide to BestPractice " by Robert Schware and Paul Kimberley. Working Paper No. 317.

Hans J. Peters, The World Bank, 1995, Institution Building and Human Resource Developmentfor Managing Trade and Industry Logistics: "Hungary 's Success Story. "

World Bank, 1995, MOLDOVA "Transport Sector Review, " Report No. 13891-MD.

World Bank, 1994, INDIA "Container Transport Logistics Project", Report No. 12780-IN.

World Bank, 1994, INDIA "Technical Assistance to Enhance Competitiveness Project,Report No. 12893-MAS.

40

World Bank, 1993, "Trade and Transport Logistics Facilitation Guidelines " byCarlos F. de Castro. Working Paper No. 4.

World Bank, 1992, HUNGARY "Project Market Development Project, " Report No. 10412-HU.

Dr. Paul 0. Roberts, Unpublished, 1998. "Lessons Learnedfrom Industrial Restructuringin Supply Chains"

Previous ECSIN Working Papers

WP1 Road Traffic Safety in the Europe and Central Asia Region, Sven-Ake Blomberg, March 1999

WP2 Overview of World Experience in Private Fmancing in the Road Sector, Ricardo Halperin and PatrickMalone, March 1999

WP3 Private Financing for the Road Sector, Alfred Watkins, John D. Kramer, Andrew Bride, and CesarQueiroz, March 1999

WP4 Case Studies of Private Financing in the Road Sector, Tore Hoven, Guillermo Gaviria, Geoffrey Shields,and Cesar Queiroz, March 1999

WP5 Price and Subsidy Policies for Urban Public Transport and Water Utilities in Transition Economies,Slobodan Mitric, March 1999

WP6 Decentralization, Local Government Capacity and Creditworthiness: Macroeconomic Aspects, PaulBernd Spahn, March 1999

WP7 The Effects of Metering on Water Consumption and Financial Performance of Water Utilities in theECA Region, Walter Stottran, March 1999

WP8 Cracow in the Twenty First Century: Princes or Merchants? Alain Bertaud, July 1999

WP9 Ad Valorem Property Taxation and Transition Economics, Anne Paugam, November 1999

WP10 ECA Railways: Trends, Prospects, and Challenges, Christopher Willoughby and E. PhilipAnderson, July 1999

WP 11 Housing Subsidies and Social Redistribution: The Case of Hungary, Zsuzsa Daniel, November1999

I

I

The World BankECSIN600 1 9 1" Street, N WWashington, D C 20433Phone (202) 458-1384Fax (202) 477-3378Cable Address INTBAFRAD

WASHINGTONDCWorld Wide Web http //www worldbank org/ecspf/ecsin/