Wed, 10 Aug 1994

SGS assignment questioned

It obviously ran counter to our national sense of pride to have been forced, by decades of bitter experiences, to distrust our own customs service. And it was quite regrettable that economic imperatives compelled us to vest part of our customs inspection authority with a foreign entity -- the Geneva-based Societe Generale de Surveillance (SGS) inspection company.

Nonetheless, we see the well-meaning suggestion of a review of the assignment of SGS and replacement of the pre-shipment inspection of import goods with a post-audit system, which was made by the Econit economic research center, as unreasonable. The conclusions of Econit's public policy review of the pre-shipment inspection of imports, as announced to the mass media on Monday, seems to have been drawn from inaccurate and incomplete information on the overall objective of the pre-shipment inspection procedure.

Econit's review concludes that the bottom line of the SGS assignment is negative because of the large amount of service fees the company charges and the delays in shipment caused by inspection. It also suggests that the pre-shipment inspection runs counter to GATT rules and argues that since the country's import tariffs have been lowered to an average 19 percent there is now little incentive to under-invoice import prices.

As recently as June, the Indonesian Importers Association -- actually the most relevant and competent party to assess the performance of SGS -- announced the findings of the questionnaires that 1,000 members had been asked to fill out. Of the 821 importers who responded to the questionnaires, 99 percent considered the pre-shipment inspection the most effective and efficient procedure for facilitating import flows. They also strongly recommended the maintenance of the procedure. That means almost all of the importers oppose the restoration of the upon- arrival (post-audit) customs checks at Indonesian ports as practiced before May, 1985.

The government itself, which as the employer of SGS is naturally most concerned about its performance, earlier announced that even though import tariffs have been lowered steadily in line with the economic reform measures and total imports now consist mostly of capital goods and basic materials, which are either exempted from tariffs or subject to very low duties, government receipts from import duties rose sharply from Rp 544.5 billion in 1984 to Rp 2.65 trillion (US$1.2 billion) in fiscal 1993/94. That indicated that under-invoicing of imports has been reduced to a negligible level.

Econit seems to be inadequately informed of the overall objective of the pre-shipment inspection. This procedure is designed not only to verify export prices and customs tariff classifications, but also the quality and quantity of imports. The government acknowledged that during the first five years of its assignment, SGS had saved more than $4.5 billion in foreign exchange through the correction of the prices of capital goods and materials imported by oil mining contractors. Had the prices not been corrected, the government would have lost a great deal of income because the development and production costs deducted by the contractors would have been much higher, thereby cutting into the government's share of the concession's output.

The inspection also is designed to check whether the capital goods to be imported by licensed investors under the duty-free facility are really not available from local suppliers. The correction resulting from pre-shipment inspection has also saved hundreds of millions of dollars by diverting imports to local sourcing.

The pre-shipment inspection for customs clearance does not violate any rules of the General Agreement on Tariffs and Trade. In fact, the Agreement on Pre-shipment Inspection concluded by the GATT negotiators on Dec.15, 1993, recognizes the need of developing countries to have recourse to pre-shipment inspection as long as and so far as it is necessary to verify the quality, quantity or price of imported goods.

Despite all the benefits of using SGS, the government has been wise to plan early on its gradual phasing out by establishing PT Surveyor Indonesia which now has more than 12 offices in exporting countries. Seven more offices will have been opened before the end of this year, so that the new company, which is 80 percent owned by the government and 20 percent by SGS, will be responsible for inspecting 85 percent of Indonesia's total imports.

The most formidable challenge now is to see to it that PT Surveyor Indonesia will gain as high a reputation, credibility and technical competence as that of SGS, which has so far been hired by 30 foreign governments and hundreds of private companies to do inspection jobs.