The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is losing $66 million in revenues annually due to inefficiencies at Bahamas Customs alone, the situation also placing tourism industry profitability and foreign direct investment (FDI) inflows “at risk”.

An Inter-American Development Bank (IDB) report for the proposed $16.5 million Trade Sector Support Programme, a project that aims to boost trade and enhance revenue collection, warned that Bahamas Customs’ current woes also threatened this nation’s World Trade Organisation (WTO) accession and implementation of the Economic Partnership Agreement (EPA) signed with the European Union (EU).

Among the concerns identified by the IDB paper was the low 5 per cent success rate when it came to seizures of illegal and smuggled goods during physical inspections of cargo by Bahamas Customs.

This, the report added, resulted in the “excessive use” of physical inspections by Customs, with up to 80 per cent of cargo imported into the Bahamas subjected to this process. This, in turn, affected “the efficient and timely clearance of goods”, increasing costs for the Bahamian private sector and creating logistics/inventory management issues.

Pointing out that the Bahamas was lagging far behind its Latin American and Caribbean counterparts when it came to Customs reforms designed to facilitate international trade and business, the IDB report said the project was designed to create and Electronic Single Window (ESW).

This will enable Bahamian customs brokers and importers, together with overseas suppliers, to submit all documents - Customs declarations, export/import permit applications, trading invoices and origin certificates - to a single location or agency.

Arguing that the $16.5 million project and ESW investment would “pay for itself” over the five-year period between now and 2017, the IDB used studies conducted by the World Bank, Organisation for Economic Co-Operation and Development (OECD) and Asia-Pacific Economic Cooperation (APEC) to determine the benefits that will accrue to the Bahamas from improved trade and associated regulatory processes.

A reduction of 1 per cent in total transaction costs would generate $31 million in savings for the Bahamas, the IDB estimated, while a 0.5 per cent reduction in Customs’ administrative costs would generate $15 million in savings.

And, if the project was to reduce the Bahamas’ import prices by 1-2 per cent, the IDB said an APEC study indicated this nation would enjoy a collective $31 million in savings.

Just increasing trade by 0.26 per cent would net the Bahamas a $17 million gain, the IDB report added, while reducing the cargo clearing time by half a day - “saving 0.25 per cent of the consignment value” would create $8 million in savings for this nation.

And those were just the projected private sector and consumer benefits. For good measure, the IDB added: “There is also a fiscal impact of the inefficiencies in trade facilitation.

“A study by the OECD presents a loss that ranges from 1-5 per cent of GDP caused by inefficient procedures. In the case of the Bahamas this loss will be equal to US$65.8 million, almost four times the total cost of this programme.”

At a time when the Government is running a projected $550 million fiscal deficit for the Budget year 2012-2013, an almost-$66 million loss attributed to Customs inefficiencies alone cannot be ignored.

The OECD estimate of losses equivalent to between 1-5 per cent of GDP indicates that inefficient Customs procedures could be costing the Treasury anywhere from $80 million to $400 million at the top end.

Referring to the projected financial benefits from implementing the ESW, the IDB added: “The most conservative forecast will present a combination of the aforementioned scenarios as the most probable outcome, not only offsetting the initial cost, but also providing the Government of the Bahamas with the capability to increase revenue by an indirect effect of the modernisation of customs operations.

“The private sector will also benefit from lower transaction costs, which adds to the overall economic value of this project.”

Analysing the issues created by Customs’ current problems, the IDB report said: “Despite its strategic location, the Bahamas remains somewhat disconnected from the rest of the world in terms of trade.”

This was because it is the only Western Hemisphere nation not yet a full WTO member, its only trade agreement to-date being the EPA with the EU that was negotiated on its behalf by CARIFORUM.

A 2011 IDB analysis of Bahamas Customs had revealed the agency was using Customs Automated Systems (CAS), and “obsolete” system designed in the late 1980s, as its main information management tool.

There was also, the report found, “very limited use of risk analysis modelling and its system, Trade Information Management System (TIM)”.

This was linked by the IDB to the relatively low seizure of smuggled or contraband goods during physical inspections. Customs was seeing “only 5 per cent efficiency in the positive hits, which leads to excessive use of physical inspections, up to 80 per cent of the cargo, that affect the efficient and timely clearance of goods at the border”.

“The WTO accession process and the implementation of EPA may be hindered by serious institutional and operational limitations at the Bahamas Customs Department (BCD) and other trade related institutions,” the IDB report warned.

“Other countries in the region have moved substantially faster than the Bahamas in terms of modernising Customs operations and introducing Electronic Single Windows (ESW) for their export-import processes.

“For example, Barbados, Trinidad and Tobago, and Jamaica are already implementing substantial reforms in Customs. The lag with respect to Latin American is even greater, when compared to small countries like Uruguay, Costa Rica and Honduras, where major reforms have already concluded.”

Bahamas Customs’ reliance on manual, lengthy procedures, such as 24 hours per import declaration and entry passenger processing, were creating the grounds for data errors and the incorrect classification/valuation of imports.

And, the IDB noted, this also negatively impacted the time and cost of moving goods into/out of the Bahamas.

“All of the above, together with limited tools for enforcement and anti-smuggling control, adversely affect the revenue collection capacity of Bahamas Customs, which currently stands at 50 per cent of the total income collected by the Government,” the IDB report said.

And it further warned: “The Bahamas remains ill-prepared to compete in the international markets. Tariff dispersion is high, and absolute barriers to entry are common when imports compete with national production.

“The country exports relatively few industrial (polystyrene) and agricultural products (lobster tails, rum and salt) with small profit margins, which reinforces the importance of having reduced logistics costs that, in some cases, will determine overall profitability.

“On the other side, the Bahamas tourism industry imports most of the goods it needs to provide services. An important part of their operational cost is also associated with the logistics costs. Given the described shortcomings at Customs, the performance and profitability of tourism is at risk, and if not resolved promptly, it could also affect the flows of FDI, which is a major engine for economic growth.”

The IDB report added that Customs was heavily reliant on the Royal Bahamas Defence Force and Harbour Patrol for its border control and security strategy.

“Due to the limitations of these agencies to give support on a sustained basis, the Customs department is left handicapped in times of need, particularly in New Providence, Grand Bahama and Exuma,” the document added.