60114 Reforming African Customs: The Results of the Africa Trade Policy Notes Cameroonian Performance Note #13 Contract Pilot1 Thomas Cantens, Gael Raballand, Nicholas Strychacz, and Tchapa Tchouawou January, 2011 Introduction A fundamental problem facing attempts to out in fiscal administrations anywhere in the facilitate international trade in Sub-Saharan world. As a result of the program, in less Africa is the inefficient and sometimes than two months the behavior of corrupt state of customs agencies. Fraud, participating customs inspectors changed corruption, and other bad practices in significantly for the better, leading to customs agencies create disincentives and reduced clearance time, increased revenues barriers to trade, and can result in negative for the Cameroonian Treasury, and a spillovers throughout the rest of the reduction in harmful corruption-related economy. Even where bad practices are not practices. The outcomes of the project present, there is a perception among the undermine the assertion of many customs population in many countries that officials that there is a tradeoff between government officials are corrupt, which trade facilitation and customs revenues. The further damages trade facilitation efforts. main policy conclusion that can be drawn from this finding is that a mixture of This policy note presents the results of an performance incentives for good work and innovative pilot program of performance sanctions on bad practices can lead to both contracts implemented in Cameroonian trade facilitation as well as increased customs agencies over a six-month period in government revenue, both factors that would 2010. The pilot program was the first of its help economic growth and development in kind and no similar project has been carried African countries. 1 This policy note is based on a longer report by Problems in Cameroonian customs Thomas Cantens, Gael Raballand, and Tchapa agencies Tchouawou, "A revised approach to customs reforms in Sub-Saharan Africa based on lessons from a performance contracts pilot in Cameroon?" The Cameroonian customs, as with many World Bank, 2010. African customs, have been perceived to be 1 often inefficient and occasionally corrupt. customs agencies based on positive The pilot program enacted in Cameroon was performance. an effort to use concrete incentives and disincentives that could quickly and The performance contracts program effectively change the behavior of customs formalized an agreement between the officers. customs managers and the customs officers, and had at its core a system of non financial The pilot program was aimed at incentives and sanctions to be applied to improvements in three inter-related areas: officers performance. The contracts were reducing clearance time, increasing customs agreed with the individual customs officials, revenues, and decreasing bad practices and and set out in detail specific results for eight corruption. indicators that must be met. Importantly, they went beyond the revenue targets fixed Opportunities for corruption are numerous: by the government to include organizational undervaluation, smuggling, incomplete and best practices issues. The program imports/exports documents and transit. defined that customs agents that were Moreover, corruption is an impediment to successful in meeting their performance customs and trade reforms. New goals would receive mainly non-financial administrative procedures may be decided incentives. Non-financial incentives by the head of the administration but not included congratulatory letters that were put applied on the field. Computerization and in the officials permanent file and other IT solutions have brought efficiency disseminated publicly to provide wider gains to customs processes, so that further recognition as one of the best inspectors in benefits from this kind of reform are limited. the customs service, options to participate in Increasing the efficiency of customs training courses, and other similar measures. officials at the individual level can play a The performance contracts required that vital role in decreasing corruption, participating customs agents take steps to minimizing transaction costs and increasing achieve the quantitative goals defined in the trade flows. contracts. The performance contracts pilot program With regards to sanctions for bad behavior, the program introduced a process of In early 2010, a pilot program was launched interviews with the program team about how in the two largest customs offices in the port the performance contracts were being of Douala (the two offices together account broken, and warnings as to possible for more than ¾ of customs revenues disciplinary action that could be taken if collected in the country) in an attempt to performance did not improve. The main overcome the inefficiencies and bad sanction was removal from the customs practices observed. Customs inspectors, as offices where the possibility of earning well as the Director General of Customs, money legally through disputed claims was signed performance contracts that focused high (since Cameroonian customs agents on trade facilitation--especially regarding receive a share of any revenue obtained the speed of processing declarations--as from fines levied on claims). The concrete well as reducing fraud, corruption, and other sanction of being transferred to an office bad practices. The overall goal of the with lower earning potential was a financial contract program was to develop a culture in disincentive that was considered to have a 2 greater impact on personal behavior than a declarations were left on hold in the positive financial incentive, based on system, making determining the evidence that financial incentives are less actual length of time needed to effective at changing actors behaviors than process the declarations difficult. financial disincentives (Crawford, 2003).2 The contract therefore set a The contract program therefore rests more maximum threshold for non-assessed on contractual governance of deviant declarations. The second objective behavior and minimizes the role of financial was to address the problem of incentives. customs agents modifying the declarations after assessment rather The performance contracts were set up to than amending the declaration at the provide a degree of flexibility during the time of assessment. This affected course of the program while at the same 80% of the declarations and time still encouraging high standards for the artificially reduced the assessment participating customs agents. Before the time, which thus no longer showed launch of the program, stakeholders were the time actually taken by agents to brought together in a contract design carry out their inspections. This workshop in order to discuss the structure trade facilitation indicator therefore and expectations of the contracts. For each aimed to expose when agents objective, a comprehensive review was behavior deviated from expected carried out to determine which parameters boundaries, which was important were to be taken into account and, once from the perspective of limiting bad these parameters had been defined, the practices. contract set a maximum or minimum Enforcement indicators: The second threshold for performance expectations. objective was to strengthen the fight Specifically, the contract program attempted against fraud and a reduction of bad to reconcile and integrate two objectives: practices. An important indicator for trade facilitation mainly measured by inspectors was the amount of duties releasing goods more quickly, and better and taxes collected when enforcement of customs laws and best declarations rerouted. This indicator practices. was adjusted for the size of claims (since disputed claims tend to be Trade facilitation indicators: The small) and the routing of declarations first objective of trade facilitation (since persistent rerouting through was to reduce the time it took to the red channel could represent a process a customs declaration, as means of putting pressure on the measured by the time between a shipper). If corruption decreased, the declarations entry by the customs amount of collected revenues should agent and its assessment by the have increased since there would be customs inspector. The key problem more revenue flowing to the agency being addressed was the non- rather than to the individual agent. assessment of declarations where During the preparation stage, the contracts 2 did not give rise to much debate given their A financial incentive scheme has been in place for years without any evidence of its positive impact on newness and some degree of distrust among bad practices. the participating customs agents. While this 3 facilitated the signing of the contracts, the declarations were assessed on the first of the regular meetings that were held day they were registered, compared every ten days were sometimes tense, since with almost 90% during the program. many of the inspectors had not completely Non-quantifiable results: Broadly understood the possible consequences of speaking, three non-quantifiable how the contracts would be enforced. This results have been observed. First, led the project team to re-explain and adapt performance contracts made it easier some indicators rather than rewrite them to conduct inspection procedures completely, which some parties to the with the operator of the container contracts wished to do. Eventually though, terminal. Second, customs agents the project team detected signs of gradual became more "diligent." The acceptance in the program. performance contracts induced agents to stay longer in the office-- time at work increased by between Results of the program 3% and 10% in the two offices, whereas other Cameroonian offices The six month program produced results that that were not part of the program had exceeded expectations. Performance by time at work decrease by -4%. customs agents improved in all areas: trade Third, customs officials became facilitation increased, revenue increased, and more aware of their responsibilities, bad practices were reduced. improving the relationship between customs agents and their managers. Specifically, the project team identified the following positive outcomes: The improvements in customs processes have also been noted by private sector Impact on revenues: The increase in actors. At the start of the program only the volume of declarations processed 17% of respondents from a survey4 of generated an additional $16.5 million brokers had a positive perception of the in revenue over the six month customs agents participating in the period.3 Cameroonian customs program; these same companies had a officials collected significantly more 100% positive perception of the customs revenues while the program was in agents at the conclusion of the program operation, with revenues from (figure 1--a higher percentage means a disputed claims--an area where better appreciation of customs). corruption had been widespread-- According to the survey, the most increasing by 17% in the larger important impact of the program has customs office and by 322% in the been the speeding of the clearance smaller customs office. process and the better attitude of Impact on trade facilitation: The customs inspectors. effect of the contracts program on 4 trade facilitation was positive. Prior The survey of seven private sector customs brokers to the implementation of the was conducted every month for the duration of the study. Three types of questions were asked: 1) the program, less than 80% of firms perception of corruption in customs, 2) how many declarations were subject to "facilitation" 3 Authors calculations estimated the revenue gain payments (and the amount of those payments), and 3) from the program at $2,757,365 per month. how often firms made payments (and the amount of those payments) to avoid duties and taxes. 4 Figure 1: Perception on Corruption in Customs among the Surveyed Companies (compared to the previous month) 120% 100% 100% 80% 83% 83% 60% 67% 57% 57% 50% 40% 33% 20% 17% 0% Source: Brokers surveys Lessons learned and the way forward Based on these results, several key findings senior managers are better aligned. Such a were derived from the pilot program. First, program is a useful approach for senior there is not a tradeoff between increased management to improve personnel behavior. trade and increased customs revenues. The More specifically, the following lessons program tried to inculcate a culture based on were learned from the contracts program and performance and good practices, and was should be considered in future efforts to successful in doing so. Customs officers reform governmental agencies. taking part in the program increased their accountability and efficiency, showing that Non-financial incentives can be as, the program made a real operational change or more, efficient than financial in the pilot customs offices. As a result of incentives in customs. This does not the success of the program, similar mean that non-financial incentives performance contracts are being extended to on their own are sufficient to change officials in two other offices in Douala. In actors behavior. However, as addition, several foreign customs customs agents told the designers of administrations have expressed interest and the contract program, there is likely a similar project will be replicated in Togo. no financial incentive for good behavior that can compensate for the However, despite the success of the personal financial gains from contracts program, there are certain corruption. In addition, government technical and political challenges that arose officials are often assumed to be as a result of the program and should be corrupt by the public in Cameroon, addressed in future programs. The whether or not there is evidence of fundamental lesson to draw from the wrongdoing. Given this context, contracts program is that the behavior of non-financial incentives can help to frontline officials can be changed rapidly if demonstrate the positive work that individual incentives and the incentives for customs agents perform. 5 Performance contracts can be most desire from senior managers to effective when an information implement the contract program is asymmetry exists between customs crucial to the programs success. A agents and managers on the ground. similar performance contracts In many cases, managers are program could feasibly be removed from the day-to-day implemented in any country where operations of customs agents, and so there is a strong desire by senior the presence of such an asymmetry management to reform an agencys can help to support the political will culture, improve performance, and from senior management necessary reduce the level of corruption in the to implement such a contract system. program. In the case of Cameroon, the head of customs was enthusiastic Concluding remarks about the experiment because it has probably also enabled her to know There are no easy solutions to increase better what happens on the ground. integrity and reduce corruption in customs Successfully implementing agencies. Building integrity requires long performance contract programs term commitment and leadership and is a require knowing preliminary details shared responsibility for both the public and about how the organization actually private sectors. works. From the perspective of customs managers, such knowledge African customs agencies should begin their provides a framework for self- reform by collecting indicators (among other evaluation. From the perspective of measures on reducing misuse of donors, experts need to have a clear discretionary power for customs frontline understanding of how the officials). Customs officers in Africa have a hierarchical chain works and how it strong knowledge of what good policies and is affected by corruption. Before procedures should look like; the main replicating the contracts program in problem lies in implementing them. For this another country, obtaining detailed reason, the collection of indicators can pave knowledge of incentives and the way for beginning this implementation. practices on the ground will be The pilot program in Cameroonian customs critical. demonstrates that focusing on behavioral Performance contract programs changes at the individual level and require a strong level of trust incorporates locally-designed solutions can between customs officers and the be one of the most efficient ways of experts implementing the program. implementing needed reform. Customs agents take the risk that the program will expose their bad practices, so it is essential that the References "designers" are neutral parties. The leadership of the organization's Crawford (A.), 2003. ",,Contractual senior managers is often found to be Governance of Deviant Behaviour". an essential factor in the success and Journal of Law and Society, Vol. 30, No 4 implementation of a new (December 2003), pp. 479-505. professional culture. Likewise, a 6 About the Authors Thomas Cantens is a French Customs Consultant in the Cameroon country office inspector and is assigned to the Research of the World Bank. This work is funded by and Strategy Unit of the World Customs the Multi-Donor Trust Fund for Trade and Organization in Brussels. Gael Raballand Development supported by the governments is a Senior Economist in the Africa Poverty of the United Kingdom, Finland, Sweden Reduction and Economic Management unit and Norway. The views expressed in this at the World Bank. Nicholas Strychacz is a paper reflect solely those of the authors and Consultant in the Africa Poverty Reduction not necessarily the views of the funders, the and Economic Management unit at the World Bank Group or its Executive World Bank. Tchapa Tchouawou is a Directors. 7