RESTRICTED
WORLD TRADE G/PSI/WP/W/14
20October 1997
ORGANIZATION(97-4560)
Original: English Working Party onPreshipment Inspection
NATIONAL EXPERIENCE WITH THE AGREEMENT
ONPRESHIPMENT INSPECTION
Communication from Kenya
Thefollowing communication, dated 14October 1997, hasbeenreceived fromthePermanent
Mission ofKenya.
_________________
Please findattached asummary ofKenya 'sexperience withPreshipment Inspection.
While PSIagencies haveplayed animportant partinenhancing revenues totheGovernment,
wealsohavesome concerns. Asweapproach theyear2000, issues ariseastowhatwillhappen to
PSIservices. Ononehand, theconcept oftransaction value isclearenough, however, weknow from
history some importers domanipulate values toreduce dutyandtaxliability. Iftheysucceed inso
doing, thecountry loses revenue andalsoexposes localproducers tounfair competition. Forsmall
economies thecapacity tobuild adequate databaseforpricecomparisons islimited. Inaddition some
goods suchasdrugs, chemicals andedible products require special attention toensure good quality
inorder tominimize riskstobothpeople andtheenvironment. These aresome oftheissues currently
addressed withthehelpofPSI.
Investments todoquality control onthewhole range ofessential imports would betoohigh
forsmall economies. Itisforthese reasons thatKenya builtintoPSIservices, laboratory tests,
supervised loading andsealing ofcontainers. Wewould wishsome oftheseaspects ofPSIareretained
beyond theyear2000.G/PSI/WP/W/14
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Kenya switched toacustoms-based Preshipment Inspection (PSI) contract administered bythe
Ministry ofFinance inMay1994 inplace ofitsprevious forex-control contract administered bythe
Central Bank. Design advice from theWorld Bank, IMFandadvisors totheCustoms Department
wasincorporated inthenewPSIarrangement. Thedesign wasadeparture fromprevious forex-based
PSIarrangements. Inconsultation withthePSIcompanies, therewasaconsensus thatthenewconcepts
werereasonable andachievable, butrequired achange inPSIcompany approach andoperations. The
features ofthearrangements areoutlined below.
Kenya awarded thePSIcontracts bygeographic region tothree separate PSIcompanies. This
created competition inthein-country operations between thecompanies thathasbeenofsignificant
benefit toKenya inestablishing thisnewapproach toPSI.
The1994-Kenya contract required theelectronic transmission ofPSIdatatothelocaloffice
where theprinting ofClean Reports ofFindings (CRF) wastooccur toensure thatthisinformation
wasavailable toCustoms andtheimporter attimeofimportation. Previous contracts didnotrequire
thisfeature, andapproximately fiftypercentoftheCRFs where notavailable atthetimeofimportation.
Averydetailed CRFwasrequired aspartofthenewPSIcontract design inKenya. TheCRF
required thePSICompany todeclare thelevelofinspection carried outoneachinspection byacode
placed ontheCRF. Thisinformation wasintended fortheusebytheCustoms Department toassist
inmaking thedegree ofCustoms verification atthetimeofimport entry presentation. TheCRFalso
required theamount ofdutyandtaxes payable using theapplicable exchange rateatthetimeofthe
printing theCRF along withother details.
AtthetimeKenya started thenewPSIprocess theforex-based import license requirements
oftheCentral Bank hadbeenremoved. AnewImport Declaration Form (IDF) wasestablished to
befiledwiththecommercial banks along withthecollection ofanIDFprocessing fee.Thecommercial
banks would process theIDFformandcollect thefeebased ontheFOBvalued declared bytheimporter,
anddispatch theIDFtotheappropriate PSIcompany. ThePSIcompany would determine ifPSIapplied
totheIDFanddatacapture theinformation.
ThenewKenya contract alsorequired thePSIcompanies totransfer theIDFandCRF data
totheCustoms Department. TheCustoms Department makes thisdataavailable toother government
Departments forforecasting revenue collection andformulation oftrade policy. TheIDFandCRF
computer datawastransferred totheCustoms Long Room 'smicro-computers andusedaspartofthe
importing process toverify thevalidity ofthedocuments being presented bytheimporter. While
curtailing theuseoffraudulent CRFs, thiselectronic datatransfer process alsoserved asatrade
facilitation feature byreducing theimport entry processing times byapproximately 50%. While the
transfer ofdatafrom thePSIcompanies canbeproblematic intechnical terms, itisamajor feature
oftheKenya PSIprogram.
Theresults ofthe1994-Kenya PSIprogramme have been dramatic increases inrevenues
collection. TheCustoms Department established aprocedure andtheCRFprovided afloorvalue for
customs valuation. Anydispute bytheimporter withthePSIvalue issettled inapostappeal process
totheimport entry processing. Theincrease inimport revenue collection allowed forthelowering
oftariff rates, which, particularly inthetopratebands, leadtofurther increases inrevenue collection
through improved importer compliance.
During the1994-contract, theIDFprocess wasfound tobefraught withheavy abuse bythe
presentation offalseIDFs, particularly withfalsefeepayment declarations. These falseIDFs were
being presented tothePSIcompanies whocould detect andreject some oftheIDFs asbeing false.
Thisprompted Kenya tochange theIDFprocess tohaving theIDFsubmitted directly tothePSIcompanyG/PSI/WP/W/14
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without thepayment ofanIDFfee.TheIDFfeeisnowcollected ontheCIF(Customs value, insurance
andfreight) value along withthecollection ofduties andtaxes ontheimport entry. Thisnewprocess
alsoacted asatradefacilitation feature byspeeding uptheIDFnotification tothePSIcompanies, and
making forone-stop shopping fortheimporter. TheIDFisaccepted bythePSIcompany bymail,
faxorhanddelivery. Thismethod ofprocessing IDFs wasselected overthemethod usedinZambia
ofhaving thecommercial banks collect theIDFfee;datacapture andtransmit theinformation tothe
PSIcompany. TheKenya Customs Department hasthecapacity toeffectively collect theIDFfee.
TheKenya contract alsooutlined thefinalprocess tocomplete thePSIcycle. Therequirement
forpostreconciliation ofCRFdataisanecessary requirement toidentify unused andunder-collected
revenues asdepicted ontheCRFs. Thisexpostreconciliation process ensures identification ofthe
over- andunder-valuation asassigned byPSIcompanies; theunder-collection ofrevenue byCustoms;
andimporter whohaveotherwise hadgoods entered intothecountry through clandestine means. Kenya
isyettosuccessfully complete fullreconciliation onPSIdata,butiswellalong thewaytoestablishing
theinfrastructure tocomplete thisessential partofthePSIprogram.
Even withthesuccess oftheKenya PSIcontract, there issome dissension withPSIcompany
performance within theGovernment andimporting community. Many examples ofwrong goods, piece
counts, quality, values andrelated problems canbecitedforimports toKenya where there hasbeen
PSIintervention. Theblame inthemajority ofthese cases cannot beplaced withthePSIcompanies
astheydidnotsupervise theloading andsealing ofthecontainer. Therefore, thegoods could have
beenadded orswitched afterthePSIintervention inthecountry ofexport. Therenewed 1997-PSI
contracts nowrequire thesealing offullcontainer loads andlaboratory analysis onpharmaceutical
andfoodproducts when requested.
Dissension withthePSIcompanies isfurther fuelled bythediscovery ofcorrupt employees
intheirorganizations. Onemustrealize thatPSIcompanies arelikely tohave"bad" employees like
anyother organization. ThePSIcompanies, however, must havetheappropriate internal controls
inplace toprotect themselves fromthiscorruption. Itappears thatallPSIcompanies donotalways
haveadequate controls inplace, andthiscreates arequirement toensure thelawsofthecontracting
country, andPSIcontracts befirminaddressing theseconcerns. Increased liability forthePSIcompany
errors andomissions should beconsidered onaworld level.
Governments whousePSIservices arediscussing theissueofhowtogainmore control over
PSIactivities andareexamining waysofreducing costswhile making thePSIservices more responsive
totheneeds ofGovernment andimporters. Theimplementation ofselectivity tomanage andobtain
enhanced PSIphysical examinations onhigh-risk shipments, andthereduction ofPSIintervention on
lowriskshipments isbeing discussed bymany Customs Departments. Thesubject ofselective
examinations inPSIprograms isacontentious issue, andmaybeinviolation oftheGATT agreement
onPSI.
Theintention ofthe1994-Kenya contract wastointroduce selective levels ofPSIduring the
course ofthecontract. Theselective examination portion ofthecontract wastobeprogressively
introduced inthesecond yearofthethree-year contract, andwastobebased onbuilding risk-profile
information databases established bythePSIcompanies. Selective examinations wereinplaceinseveral
countries using PSIandthiswasnotanewconcept. Selective examinations werenever implemented
under the1994 contract, however, norintherenewed contract of1997, andselectivity hasnotbeen
effective inother countries.
PSIinspectionshavetobecompletedinanon-discriminatorymanneraccordingtotheagreements
oftheUruguay Round ofGATT. These non-discriminatory inspections arebinding onMembers of
theWorld Trade Organization (WTO) whocontract PSIcompanies.G/PSI/WP/W/14
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Inpractice, thePSIcompany performs avariety ofdetailed andnotsodetailed inspections
tomeet therequirements oftheircontract. Forexample, thePSIcompany mayphysically inspect
thegoods andwhile doing somaycomplete acomprehensive count oftheproduct, sometimes sealing
acontainer, checking expiry dates, while atother times aquick lookattheproduct being exported
isallthatisperformed. Usually aprice check iscompleted against acomputerised valuation database
todetermine thevalue andHarmonized Code (HC) oftheshipment. Thedegree ofthePSIinspection
hashistorically beensolely atthediscretion ofthePSIcompany.
Onecould make anargument thatunder thecurrent arrangements, aPSIcompany having the
soledecision astothedetail oftheinspection ornon-inspection, there isdiscrimination, asthere is
nocontrolledorlogicalbasistothisintervention.ItisthisbeliefbysomeGovernmentsandorganizations
thatprompts thediscussion ofselective examinations toobtain better value formoney.
Anexample istheimporter whoimports newcarsandhasahistory ofevery carbeing declared
withcorrect values, quantity andserial numbers. Despite thefactthatshipments ofthisnature are
ofhighvalue, isitnecessary tocomplete adetailed inspection, oranytypeofinspection forevery
importation? Itislikely thatthePSIcompany doesnot,infact,complete adetailed inspection ofall
shipments, andtherefore isitappropriate topaythePSIforafullservice forevery shipment? Itwould
appear thatvalue formoney isnotbeing received inthisexample asevery shipment would notreceive
thesame levelofintervention and/or many oftheinspections areredundant. Itwould beappropriate,
however, torequest thePSIcompany toperform detailed inspections occasionally toconfirm the
importers continuing integrity, andpayanappropriate feeforthelevelofservice provided.
Bycontrast, forexample, pharmaceuticals andfoodproducts aredumped intocountries with
nearoralready expired usedates. Should theGovernment beabletodirect thecontracted PSIcompany
tocomplete detailed inspections forthistypeofproduct, andidentify problems inthecountry ofexport,
rather thanCustoms stopping theshipment onimportation? Inthisexamples, thePSIcompanies would
perform avaluable service totheGovernment, thepublic atlarge, andhonest importers.
There isalsoafeeling among some governments andinternational organizations thatPSIis
noteffective forCustoms purposes. Customs organizations mayalsoconsider PSIcompanies athreat
totheirsovereignty, andresist theuseofPSIcompanies. Kenya isanexample where PSIhasbeen
designed asaneffective toolforCustoms, andabalance hasbeenreached tominimise tradeimpediments
caused byPSI. Having theopportunity todirect thePSICompany 'sactivities though selective
examinations would facilitate trade, protect importers andconsumers.
Withallofthesepointsinmind,GovernmentsaredemandingmoreservicesfromPSIcompanies
tofullyintervene insensitive importations, andperform reduced intervention forlesssensitive shipment.
Governments wanttoreward honest importers andfacilitate theirtrade, while atthesame timeensure
ahigher levelofnon-discriminatory inspection onhigh-risk importations. Despite known irregularities,
andcomplaints byCustoms officials toPSIcompanies, there hasbeenlittleornoadjustment bythe
PSIcompanies toincrease thelevelofintervention forthese sensitive importations. Rather, thePSI
companies hidebehind theguise ofbeing non-discriminatory intheirexaminations asanexcuse for
unresponsive performance.
With themicro-computer revolution nowprevalent indeveloping countries, computerized
non-discretionary selectivity isanexcellent theoretical possibility. Newavenues ofopportunity exist
withthecomputer revolution thatwasnotpossible intheprevious PSIenvironments ofafewyears
ago.
Acomputerized selectivity design could work onapoint ratiosystem thathascategories for
importer, exporter, HScode, value, country ofexport, andmode oftransport. EachofthecategoriesG/PSI/WP/W/14
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hasanumerical allotment levelwithsome categories being weighted heavier thanothers. Mandatory
fullexamination would berequired ofthecategories ofimporter, countries ofexport orHScode, for
example, thatarerated atthetoplevel.
PSIcompanies would benefit fromcomputerized selectivity inasmuch astheywould notbe
using theirdiscretion todetermine thelevelofinspection. Thiswould protect thePSIcompanies from
inappropriate criticism.
Thebenefit toGovernment istheassurance thatthePSIcompanies aredirecting theirefforts
tothemostcritical areas ofGovernment concern. Inthatregard, thePSIcompanies willembellish
theirprofile asaservant toGovernment.
Thecomputerization revolution indeveloping countries willforce achange ofthestandard
PSIagreements around theworld. Governments andimporters willalsodemand achange tothePSI
arrangements toreduce theircosts, andtoseekaphase outofPSIwhere theCustoms service capacity
andcomputerization hasdeveloped enough tobeselfsustaining. There maywellremain apurchasing
agent role,however, forPSIindirectly servicing theimporter byverifying thequality andquantity
ofimports, andguard against over-invoicing forthepurposes ofcompany theft. Thisservice could
beprovided where theGovernments havephased outPSI.Additionally, under GATT valuation rules,
PSIcompanies could playaroleinoffering anopinion toCustoms ofselected imports where the
valuation might beinquestion, andtheCustoms service requires supporting evaluation tochallenge
Importers declaration. Thiswould bestbeaccomplished where thereiselectronic filling oftheimporter
declaration, andacomputerization risk/valuation system thatwould select shipment forPSIintervention.
Thefuture roleofPSIindeveloping countries under GATT valuation requires further
examination. Thecurrent benefits ofPSIarrangements under BDV rulesstemmainly fromavoiding
discretion attheportofimportation which avoids negotiated duties. Atthesame time, thetraders
areprovided withagenerally reasonable valuation bythePSIcompany --typically thePSIvalue or
avalue based onthesame orsimilar goods traded between thecountries inquestion. Unfortunately,
therequirement forcompliance withGATT valuation rules by2000 willremove thiscurrent value
ofPSItomany lessdeveloped countries. Atbest,PSIvaluation cansupply asupport service todetect
falsedeclarations butthedifficult problem ofcontrolling negotiated customs values willreturn. The
wisdom oftherequirement offullcompliance withGATT rulesby2000 bycountries withweak and
stilldeveloping customs administrations hastobeheldinserious question.
Insmall economies withlimited resources suchasKenya, there willbeanongoing needto
getindependent thirdparty assistance insupplying export-country prices, providing quality assurance
(particularlyinhealthrelatedproducts)andquantitychecks.Whilethecapacitiesoflocaladministrations
arebeing strengthened, thisprocess willtakemore timeandresources thanareavailable between now
and2000. Thechallenge istodefine acost-effective roleforPSIcompanies tosupport thesevaluation,
quality assurance andquantity checking needs.
TheKenya experience could setthestandard foreffective PSIcontracts around theworld.
Itisclear thatthesuccess ofKenya isbased onthecareful design, active management ofthePSI
companies, andtheeffective useofcomputerization. These points should bethebases forother PSI
contracts around theworld. Unfortunately, much ofthebenefit ofsome ofthelessons learned will
belostwiththerequirement forfullcompliance withGATT valuation rulesin2000. Either newroles
forPSIcompaniesshouldbedesignedorspecialdispensationprovidedunderGATTtoallowlow-income
developing countries tocontinue tousePSIvaluations tolimit discretionary ornegotiated customs
valuation.