more than that. By starting from scratch, in many ways Peru surpassed the degree of modernization and the quality of management systems that can be found in many industrial countries. That is not to say that the system is perfect, and improvements and adjustments are possible or needed in a num-ber of areas, but that situation is characteristic of customs administration. Given its position in the middle of foreign trade operations, customs admin-istration needs to be flexible and able to adapt to changes in the sector.
Background and Origin of the Customs Reform
This section summarizes the characteristics of the trade and tariff regime and the customs adminis-tration in 1990 and how the economic crisis that erupted that year led to important policy and insti-tutional reforms, including the customs adminis-tration reform.
Trade and Tariff Regime in 1990
In 1990, Peru’s trade regime was characterized by intervention, regulation, and protection. The import tariff regime was complex, consisting of 39 different rates, ranging from 10 percent to 84 per-cent, along with 14 different surtaxes. In combina-tion, the tariffs and surtaxes amounted to 56 rates ranging from 10 to 110 percent. The overall rate level was high. The unweighted, average, nominal tariff rate, excluding surtaxes, was 46.5 percent.
Multiple exemptions and numerous nontariff barriers added further complexity. Peru also had 130 special exemption regimes. Nontariff barriers included quantitative restrictions, prohibitions on 539 tariff items, licenses, importer and exporter registration, authorizations, and administrative requirements. Exports were subsidized.
Customs Administration in 1990
In 1990, Peru’s customs administration was disor-ganized, inefficient, and corrupt, and it had a nega-tive public image. Out of 4,700 personnel, only 2 percent were professionals. Salaries were low and training was inadequate. In addition, discipline was poor and the incidence of corruption was high.
Laws and regulations were uncoordinated and
contradictory, and neither customs personnel nor the private sector were familiar with them; as a result they were not properly applied. Working without guidelines or instructions, personnel acted on suspicions rather than on good faith. Discre-tionary action was the rule. Procedures were bureaucratic and cumbersome, with excessive clearance controls. Customs valuation was subjec-tive; thus the duties and taxes charged on import shipments were unpredictable. On average, goods were not released from customs until more than 20 days after the presentation of declarations. Such delays substantially increased costs for import and export businesses.
Computing equipment was inadequate, and the customs administration lacked professional staff members with adequate computer skills. The customs process was almost entirely based on paperwork. Statistics were processed through a mainframe computer at the Ministry of Economy and Finance (MEF) that served the entire ministry.
Statistics, prepared only after huge delays, were obsolete by the time they were ready. Infrastructure was precarious and, at some customs offices, non-existent. Vehicles were not available for operational activities, and communication links between head-quarters and field offices were lacking.
The customs administration’s collection func-tion was not effectively controlled. Revenue collec-tion procedures lacked rigor and resulted in a large number of disputes and litigation cases. In addi-tion, many payment checks lacked deposit cover-age, but the customs administration failed to take action to recover revenue. Customs policy was not clearly defined, and institutional development plans did not exist. Also the customs administra-tion failed to provide the public with informaadministra-tion about rules, procedures, and activities. Personnel changes in senior management positions were frequent. Finally, the customs administration depended on the MEF for its budget. There was no investment budget, and budgetary programs were not properly implemented.
The 1990 Economic Crisis
The Peruvian customs reform came about as a result of the 1990 economic crisis. In 1990, Peru faced an unprecedented collapse of its public finances. Tax revenue, which had averaged between
15.0 and 17.0 percent of gross domestic product (GDP) in the mid-1980s, had fallen to 8.7 percent of GDP, and GDP itself was also falling. Those developments coincided with hyperinflation and increasing terrorism by the Shining Path. To bring Peru out of the crisis, newly elected President Alberto Fujimori launched major policy and insti-tutional reforms. The old trade policy of interven-tionism and protection was replaced by a policy of deregulation, openness, and liberalization. Within a year, quantitative restrictions and other nontariff barriers had been virtually eliminated, the tariff structure had been simplified to only a few low rates, and most exemptions had been abolished.
On the institutional side, a January 1991 decree mandated the reform of all public entities of the central and regional governments and decentral-ized public institutions. Customs reform was con-sidered urgent because of the fiscal emergency and the need to reduce obstacles to trade. A March 1991 decree empowered the customs administration to reorganize itself. The subsequent Legislative Decree Number 680 stipulated that the reorganization must encompass the redefinition of a national cus-toms policy, a new organizational structure, the professionalization of staff, the implementation of an integrated computerized system for administra-tive and technical operations, an overall moral-ization of customs staff, the reactivation of foreign trade, and an increase in budgetary revenue.
Laying the Foundation for Reform This section reviews important initial measures taken to establish a solid basis for sustainable reform.
Fully Dedicated Reform Manager and Team In December 1990, President Fujimori appointed Carmen Higaonna as superintendent of the cus-toms administration with a mandate to reform the agency. Higaonna was eminently qualified for the job. After obtaining her degree in economics, she worked for 10 years in the MEF’s Tax Office, where she gained experience in tax policy and administration. For the next 10 years, she worked in the General Auditor’s Office, where she was respon-sible for auditing the customs administration and gained in-depth knowledge of its workings and
failings. During that period, she also obtained a certificate as a customs technician after attending a three-month course sponsored by the German Technical Assistance Agency. In 1990, Higaonna and her team prepared a report for the president on the state of the customs administration.
Thus, when Higaonna was given responsibility for reforming the customs administration, she was in the excellent position of already having consider-able insider information about every component of the administration. In addition, she had no politi-cal affiliations and was given a high degree of free-dom in carrying out the reform. She put together a reform team consisting of 20 officials, whom she had brought in from the General Auditor’s Office.
They had worked together auditing the customs administration for many years, and 17 of them also had obtained the German Technical Assistance Agency’s customs technician certificate. That core team was later strengthened with officers retained from the existing customs administration, follow-ing a strfollow-ingent selection process. The team worked full-time on the reform for about five years.
Support from the Highest Authority
Opposition from vested interests was strong during the initial stages of the reform. The policy of open-ing up the economy and reformopen-ing the customs administration to facilitate trade did not sit well with business lobbies that were used to import protection and other special treatment. Customs officials also opposed the reforms, albeit for other reasons: they wanted to protect their jobs and privileges. Congress strongly opposed the reforms, which would have affected some well-entrenched vested interests.
Despite such opposition, the reformers went ahead, thanks to personal and unrelenting support from the president, who met with Higaonna frequently during the initial years of the reform and protected her from political interference. As the reforms progressed, opposition decreased.
Opposition from Congress disappeared because the president disbanded Congress in 1992. Opposition from customs personnel disappeared with the new staffing and working conditions that were intro-duced in the first year of reform. Business and industry began seeing the gains from reform and eventually gave it their support.
External Support and Financing
In 1991, the reform received a substantial budget of US$3.4 million from the technical cooperation component of a trade adjustment loan financed by the Inter-American Development Bank (IDB). The IDB provided this support for Peru to prepare new customs laws and regulations, establish a new orga-nizational structure, streamline and computerize operational procedures, upgrade the physical infra-structure, adopt a new salary scale, and implement training programs in the National Customs School.
The support covered the hiring of international and national experts; the acquisition of computers, communications equipment, and laboratory equip-ment; and the hiring of highly specialized instruc-tors for the National Customs School.
The IDB continued its support with three more loans: a US$1.5 million loan in 1994 to consolidate the reform, a US$750,000 loan in 1997 to establish a certified quality system, and a US$1 million loan in 1999 to consolidate and extend the quality sys-tem and introduce the World Trade Organization (WTO) Agreement on Customs Valuation. The reform was also financed internally through the customs administration budget. Approved legisla-tion granted budgetary autonomy to the admin-istration. Two percent of customs revenue was allocated to finance operational expenses, and 1 per-cent was allocated to the annual investment plan designed to modernize the customs system.
Design, Planning, and Monitoring
Members of the reform team took study trips to countries that had modern customs administra-tions or had successfully reformed their customs services to learn about best practices in customs administration and reform. The reform team designed the reform plan, working closely with the MEF and with IDB experts in the context of the technical cooperation program. Throughout the reform, MEF and IDB experts monitored imple-mentation.
Reform Objectives and Strategies
Given the chaotic state of the customs administra-tion, a piecemeal approach to reform would evi-dently have been insufficient and an integral
restructuring and transformation was needed. The reform team set out to develop a strategy and pro-gram to convert the administration into a profes-sional, dynamic, modern, and efficient one that would be an effective instrument of fiscal policy and foreign trade and would have a positive public image. The program was constructed around three basic themes: moralization, professionalization, and modernization. The envisaged outcome was a customs system that would (a) facilitate trade;
(b) operate on the basis of good faith; (c) limit the discretion of customs officers; (d) be fully comput-erized; (e) implement a self-assessment system of duty liability; (f) selectively check transactions, with a maximum of 15 percent of transactions undergoing physical inspection; (g) rely on postre-lease checking; (h) delegate functions to the private sector, such as banks (to collect duty payments), privately operated warehouses, customs brokerage services, and preshipment inspection (PSI) compa-nies (to help establish the customs value of imports); (i) be professional; and (j) be quality cer-tified (International Standards Organization 9000).
The team planned to achieve this system by such means as revising and systematizing customs legislation, restructuring the organization of the customs administration, adopting modern man-agement systems, revising personnel and training policies and systems, streamlining and computeriz-ing operational procedures, and modernizcomputeriz-ing infrastructure. The reform team concretized the specific objectives and strategies in its reform plans for the consecutive phases of the reform.
Reform Measures
The key measures that resulted in successful reform involved legislation, organization and manage-ment, personnel recruitment and developmanage-ment, and computerization and other information and communication technology (ICT) applications that supported clearance procedures and the new cus-toms control strategy.
Legislation
At the beginning of the reform process, fundamen-tal legislation was passed to change the trade regime, thereby enabling and supporting the customs administration reform.
Trade liberalization policies not only made reform of the customs administration necessary to remove administrative obstacles to trade but also enormously simplified customs administration, thereby creating conditions needed for the reform to succeed. Significant steps toward liberalizing and simplifying the tariff and trade regime were made during August and September 1990 and were contin-ued in subsequent years. Table 6.1 highlights the key elements of the tariff regime in 1990, 1997, and 2002.
In relation to customs administration, crucial legislation was passed at the beginning of the re-form process, including the following:
• In 1991, a supreme decree and Legislative Decree Number 680 set out the objectives and direction of the reform. Those decrees are of utmost importance because they provided the customs administration with the autonomy to reorganize itself. Such autonomy was crucial because it greatly facilitated the development and imple-mentation of measures needed to achieve reform objectives in such sensitive areas as personnel policy and management. It also allowed the cus-toms administration to use its budget effectively and flexibly to operate and, thus, to achieve its goals much like a private business.
• Decree Number 659 of August 1991 introduced the Import Verification Program, the first measure geared toward outsourcing customs functions to the private sector.1The measure
met with intense opposition from importers, not only because they had to pay for inspections but also because it made corruption more difficult. The customs administration itself per-ceived the measure as demonstrating a lack of confidence in the administration. However, the program proved useful because it provided price and product information that would otherwise not have been available. The Import Verification Program has been renewed annu-ally, although its continuation has remained controversial.
• The new General Customs Law and Regulations and the new Organizational Law on Customs became effective in March 1992 and December 1992, respectively. Customs legislation was updated as the reforms progressed. The General Customs Law of 1996 (Legislative Decree Num-ber 809) has been the basis of customs adminis-tration to date.
The new laws provided the necessary legal basis for the professionalization, moralization, and modern-ization of the customs administration. They harmonized and systematized customs laws and adapted them to international norms and stan-dards and to the requirements of an open trade regime.2 The laws enabled the effective TABLE 6.1 Tariff Regime, Selected Years
Aspects of the Regime 1990 1997 2002
Number of rates 56 4a 7b
Highest rate 110 25 25
Lowest rate 10 12 4
Nonweighted average nominal rate 47 14 11
Prohibitions 539 25 —
Nontariff barriers Numerous — —
— Not available.
a. Basic rates of 12 and 20 percent and surtax of 5 percent combine to 12, 17, 20, and 25 percent.
b. Basic rates of 4, 7, 12, and 20 percent and surtax of 5 percent combine to 4, 7, 9, 12, 17, 20, and 25 percent.
Source:National Customs Service data.
1. This measure was not part of Higaonna’s program but was imposed by the MEF.
2. Peru has been a contracting party to the World Customs Organization since 1969, the multilateral agreements included in the Uruguay Round decision since 1994, and the Harmonized Commodity Description and Coding System since 1998.
organization of the National Customs Service (NCS, see figure 6.1); the effective management of human, budgetary, and physical resources; and the introduction and implementation of modern administrative and control procedures and systems.
They also established the principles of good faith and presumption of innocence and were geared toward minimizing discretion in customs adminis-tration, providing for reliance on postrelease audits, and facilitating trade. Finally, they regulated the functions that the private sector was to per-form, such as acting as customs agents, warehouse operators, and shipping agents.
Organization and Management
The objective of the reform was to establish an organizational structure that would be functional and modern, have the necessary infrastructure and equipment, and allow management to achieve
administrative goals through autonomy and accountability.3
The March 1991 supreme decree provided the customs administration with administrative auton-omy on a temporary basis and in broad terms. The organizational law of March 1992 rendered that autonomy permanent and defined it more specifi-cally. The law established the customs administra-tion as a decentralized public instituadministra-tion under the MEF with administrative, economic, budgetary, financial, and technical autonomy. The president selects the superintendent of the NCS on the recom-mendation of the minister of economy and finance, FIGURE 6.1 Organizational Structure of the National Customs Service
NATIONAL CUSTOMS SERVICE Organizational Structure: Phase 2001–2002
Statute, Resol. National Customs Service Nr 226 of 15.02.2001 National Customs
Service Executive Office Internal Audit
Office
General Secretariat
National Customs School
Legal Affairs Office
Attorney’s Office
National Information Systems Department
National Administration and Collection Department
National Human Resources Department
National Customs Techniques Department
National Audit Department
National Fraud Prevention and Border Control Department
Regional Customs Offices
Source:National Customs Service.
3. A July 2002 decree stipulated the integration of the NCS and the Internal Revenue Service, to be effective within 90 days. The objec-tive was to expand the tax base through improved revenue control, including more intense cross-checking of information, and to realize economies of scale in such areas as computerization.
and the superintendent is appointed by a cabinet resolution. The superintendent has the power to hire and fire customs personnel at any level.
Economic, budgetary, and financial autonomy allows the NCS to finance its operations and invest-ments. The law allows the NCS to retain 3 percent of customs revenue collections and to charge fees for its services. There is no nominal upper limit. Two-thirds of that income is to be used for operations and one-third for investment in customs modernization.
In general, the NCS decides autonomously how to use its budget; however, in addition to the require-ment that it use part of its budget for investrequire-ment, the MEF’s Office of State Institutions and Organisms must approve the salaries of customs staff. Further-more, budgetary autonomy depends on governmen-tal approval: at the request of the executive branch, the allocation of 3 percent of customs revenue can be changed by a simple act of Congress.
That extensive autonomy has been a decisive factor in bringing about reform. It has allowed the NCS to accomplish the following:
• Set and implement its personnel policy inde-pendently, including firing and laying off staff;
implement a new, rigorous recruitment system;
and adopt a private sector employment regime that allows the NCS to pay much higher salaries than those prevailing in the public sector and reduces incentives for staff members to engage in corrupt behavior.
• Develop administrative and operational norms, systems, and procedures that largely eliminate discretionary decisionmaking; reduce interac-tions between customs officers and foreign trade operators to a minimum; and make customs administration transparent and predictable.
• Develop norms and procedures that are inde-pendent of the standard rules set for public administration in general and freely adapt them to the needs of a modern customs administration.
• Operate like a private business, unencumbered by rules set by other agencies concerning travel, procurement, and so on.
Every year, the NCS and the MEF sign a manage-ment agreemanage-ment that commits the NCS to the pur-suit of institutional objectives and management targets. The agreement provides for periodic evalu-ations to assess whether the NCS is achieving its
objectives in a timely manner. It also enables the NCS to pay productivity bonuses to its personnel subject to certain conditions. More on this agree-ment is included in appendix 6.A.
In 2003, the NCS and the Internal Revenue Ser-vice were consolidated into a single organization.
The objective of this recent organizational change was to expand the tax base through improved revenue control, including more intense cross-checking of information, and to realize economies of scale in such areas as computerization.
One of the objectives of the reform was to estab-lish an administration characterized by openness and transparency. To this end, the NCS closely involves foreign trade operators, customs agents, and the public in its reform plans and consults with them on its proposals for changing customs law, reg-ulations, and procedures. For instance, meetings that included representatives of the NCS’s Legal Department and foreign trade operators led to the realization that the Customs Law needed to be revised. Following the drafting of an initial set of revisions, the NCS will solicit the opinions of foreign trade operators, other users, and the public and will prepare a new draft that will reflect their comments.
The NCS makes information about rules, regula-tions, activities, and programs available through its Web site. Detailed data on foreign trade operations, including the details of every customs declaration that the NCS processes, are also available. In addition, the customs valuation data bank is also accessible to anyone interested in the value of specific imports.
The transparency of customs operations not only supports the customs administration’s opera-tions and reform plans through consultation and information but also helps preserve integrity and gives the customs administration a favorable image.
That is an important factor in securing the sustain-ability of the reforms.
Personnel Recruitment and Development
The first important reform measure was the removal of all nonperforming, underperforming, and corrupt personnel. A voluntary withdrawal program was introduced whereby such personnel were offered significant monetary amounts as an incentive to leave. Personnel who opted not to leave under this arrangement were required to pass an external examination that was organized in cooper-ation with the Ncooper-ational Engineering University.