Reforming customs service

Our front-page investigative story on the customs service on Monday serves only to validate what businesspeople have been complaining about over the last few years and to confirm the findings of a survey of public institutions during the period October 2000 to March 2001. It was sponsored by several multilateral agencies and ranked the customs directorate general as one of the most corrupt offices in Indonesia.

The extensive web of corruption and collusion was also revealed by research carried out last year by the Economic and Social Research Institute of the University of Indonesia and a separate study by the Indonesian Importers Association. Both studies estimated state losses from under-invoicing of import prices alone at US$1.2 billion to $2 billion per year.

The Association of Sugarcane Farmers in Central and East Java recently urged the attorney general to investigate Director General of Customs and Excise Permana Agung for alleged collusion between customs officials and importers to allow sugar imports to enter the domestic market without properly paying import tariffs. The farmers have even sued the director general through the State Administrative Court on charges of allowing sugar imports to kill the domestic sugar industry.

Yet the government has not yet taken any concrete measures to address the problems. The Cabinet apparently did not see the issue as severe enough to deserve urgent action, seemingly resigned to accepting that the customs problems are simply the reflection of the generally low level of tax morality within the country.

Last week, Permana Agung told a press conference that the government and the International Monetary Fund had agreed on a 17-point reform of the customs service, which would be implemented next year. He did not elaborate on the reform measures, only saying that a steering committee would be set up to formulate technical details of the program and an advisory committee would be formed to monitor and advise on the reform implementation.

It is imperative for the government to realize that even though the customs issue appears to be simply a commonplace feature within a bureaucracy that has been perceived as one of the most corrupt in the world, the impact of a corrupt customs service on the economy is much more devastating than, say, malfeasance at the tax office.

The most damaging effect of malfeasance within the tax service is loss of state revenue, as the government receives much less than it is due from taxpayers. But corruption within the customs service inflicts far-reaching damage on the economy. Violations of customs rules, besides causing revenue losses, create distortions within the domestic market because foreign goods, which pay much less duty and taxes than are mandated by law, pose unfair competition on domestic products, similar to the market disruption the sugarcane farmers and other industrial associations have been complaining about.

No trade policy instruments will be effective, however well designed they may be, if the customs service, which is responsible for guarding the gateways (airports and seaports) to the country, remains as highly venal and technically incompetent as it is now. There will never be fair trade without an efficient, clean customs service.

The service plays a vital role not only in preventing under- invoicing but also in facilitating the smooth flow of imports, which is vital to the domestic manufacturing industry due to its heavy dependence on imported materials and components.

The government, therefore, should place overall reform of the customs service at the top of its priorities, especially in view of the forthcoming implementation of the ASEAN Free Trade Area in January, whereby import tariffs for most manufactured good with at least 40 percent ASEAN content will be cut to a range of zero percent to 5 percent. The domestic market would be flooded by imports from other ASEAN countries if importers could collude with customs officials to circumvent the minimum 40 percent ASEAN content rule.

True, corrupt mentality is a disease that cannot be cured within one or two years and cannot be treated in isolation from other government and state institutions. But manufacturers and farmers cannot afford to wait that long.

The government needs to emulate the bold measures taken by then president Soeharto in 1985, when he hired an independent survey company to assist the customs service in its inspection of imports at ports of loading (at countries of origin).

Such bold measures seem essential now to supplement gradual reform measures within the general campaign to develop good governance. Most important too is that such bold, contingency measures will simultaneously address the problems of corruption and technical incompetence within the customs service, expedite import flows and ensure fair trade.