68222 JANUARY 2012 ABOUT THE AUTHORS GAGIK GABRIELYAN Putting Trade Logistics Reform is a leading specialist in trade and trade logistics, who has worked with IFC as a trade consultant since “on the Map� in Armenia January 2010. His previous experience includes intensive How can a country move up 54 places in the Doing Business “Trading Across involvement in developing Armenia’s international trade and economic Borders� ranking in just two years? Armenia did it through trade logistics relations, including with Commonwealth of Independent reform — with help from IFC’s Armenia Doing Business Reform and Regulatory States countries, the WTO, and the EU. Gagik also teaches business/ Simplification Project, launched in February 2009. The Project team builds economics master courses at American University of Armenia. constructive relationships — including well-designed and consistent communication — with the Ministry of Economy, the Customs Service, and ANKUR HURIA is a trade logistics specialist with the private sector to identify key issues and challenges and to design and Investment Climate Services of the World Bank Group. Since 2008, he implement reform measures. A key element of this advice has been IFC’s has worked on trade logistics projects with over 15 clients in assistance in preparing a detailed Import/Export Process Map, used to guide Sub-Saharan Africa, Central Asia, Southeast Europe, and the trade logistics reforms. This SmartLesson explains the Project’s design Caribbean. Ankur’s prior work approach to trade logistics reforms in Armenia (which can be customized experience includes private and nonprofit sectors. and implemented in other locations) and shares key lessons learned. ARSEN NAZARYAN is Project Manager of the Armenia Doing Business Reform and Background Regulatory Simplification Project since 2010, works with public and Armenia is a small, net-importing, landlocked private sector clients in Armenia, promoting and implementing country located between the Black and regulatory simplification reforms. Caspian Seas. It borders Azerbaijan (with Arsen joined IFC in February 2009 as which it has been in conflict since 1988), a project coordinator, managing Georgia (recently in conflict with Russia), Iran relationships with the government. Arsen also has been a lecturer in (facing international trade sanctions), and business law at private universities Turkey (with which Armenia has not had in Armenia. diplomatic relations since 1991). Being landlocked — and surrounded by difficult APPROVING MANAGER Uma Subramanian, Lead Private geopolitical circumstances — amplifies Sector Development Specialist, Armenia’s trade logistics challenges, making International Trade and Investment, trade logistics reform critical. Since the early Investment Climate Department; Lisa Kaestner, Manager, Investment 1990s, Armenia has been reforming in the Climate, Europe and Central Asia direction of trade liberalization. As an Because import/export procedures are Advisory Services. important step, Armenia was involved in the complex, it is often difficult to pinpoint World Trade Organization (WTO) accession bottlenecks. negotiations in the mid-1990s and became a member of the WTO in 2003. Efforts to comply Photo Credit: Gagik Gabrielyan with WTO rules stimulated and contributed significantly to the improvement of trade- related legal and institutional frameworks. the trade logistics supply chain. In 2009, the Armenia has made further reform efforts to country was 136th in the Doing Business harmonize its regulations with those of the “Trading Across Borders� ranking. It took 30 European Union (EU), and is currently days and 6 documents to export and 24 days negotiating a Free Trade Agreement with the and 8 documents to import. Critical trade EU. logistics bottlenecks were: However, a wide variety of challenges still • Large number of documents required for confronted Armenia across different parts of clearance, plus problems related to SMARTLESSONS — JANUARY 2012 1 document processing by multiple agencies, exacerbated quick wins and medium-term reforms. by the lack of electronic self-declaration and clearance systems; • Assist relevant agencies in implementing the quick-win reforms. • Burdensome technical control carried out by multiple agencies at the border, causing goods to be detained at • Build on the success of quick wins and dissemination the border and leading to delays and increased costs, plans with all the parties involved in trade logistics to with technical control frequently requiring more time create momentum for additional systemic medium- than customs; term reforms. • Lack of coordination between customs and technical Using this detailed process mapping, the Project was able to control agencies, resulting in unsynchronized action identify and suggest to the government over 40 and inefficiency, and requiring traders to travel improvements, covering a large part of the trade supply multiple times to different agency offices; chain. (See Box 1.) • Low use of risk-based systems in customs and technical control procedures, resulting in an unreasonably high Box 1: Reform and Results frequency of physical inspection of cargo; and With the Project’s assistance, the government adopted • Problems related to determination of the customs and implemented over a dozen improvements, including values of imported goods, in particular in following the following: WTO principles in applying the transaction value method. • Reducing the number of documents required for cus- toms clearance (for example, elimination of prior writ- Because import/export procedures are complex and involve ten permissions for export/import of animal and plant many different agencies, it is often difficult to identify products, elimination of certificates of conformity, and where the real bottleneck resides. It is common for agencies reduction in the number of documents required by the to shift blame for delays. In Armenia, for instance, traders Customs Service); and other state agencies saw the Customs Service as the major source of delays. Conversely, the Customs Service • Simplifying six technical control procedures (certification argued that time delays were due to the inability of of origin of goods, veterinary and phytosanitary control technical control agencies to conduct themselves efficiently of imports/exports, mandatory conformity assessment — and to dishonest traders undervaluing cargo that of imports, control over the import of consignments in- required multiple inspections. Importantly, there was cluding measuring devices, and export control over du- neither a clear understanding nor any appreciation of the al-use goods); complete trade logistics supply chain or of the customs and technical control procedures required in international • Improving the risk management system (reducing cus- trade. toms and technical control costs for businesses during import/export processes, certification of origin proce- THE PROJECT dures, veterinary and food safety controls, and assign- ing of green, yellow, or red channel for imported cargo); In response to a request from the government of Armenia, IFC launched an Advisory Services Project to support the • Preparing a Web-based interactive step-by-step detailed business sector by providing advice to the government on practical guide for businesses, now available on the Ar- improving the investment climate. IFC is implementing the menian Development Agency’s website (www.ada.am), Project in partnership with the Austrian Ministry of Finance, which significantly increases the transparency of import/ the Netherlands Ministry for Development Cooperation, export procedures. This interactive map covers all proce- the Luxemburg Ministry of Finance, and the Consortium of dures of customs and technical control at different lev- Commercial Promotion of Catalonia. One of the important els of detail, with references to relevant documents and components is Trade Logistics. The Project’s Trade Logistics legal acts, and it can serve as a resource for traders as part takes the following approach: well as other parties involved in trade procedures. • Prepare a detailed and comprehensive map of all the procedures, providing a broad overview accompanied Lessons Learned by a detailed analysis of the import/export processes. Lesson 1: Process mapping works! It identifies pressure • Communicate extensively with all stakeholders to points and convinces skeptics of the need for trade create a realistic assessment of the circumstances and logistics reform. build trust in the Project and its team. At the beginning of the Project, the need for an overview • Identify the main issues and bottlenecks, including an of import/export processes became clear — to help analysis of the legal and institutional framework for policymakers understand the trade logistics supply chain, trade logistics, and highlight potential short-term identify pressure points, and propose solutions. The key 2 SMARTLESSONS — JANUARY 2012 counterpart agency was skeptical and believed the primary bottlenecks were outside of Armenia. The Project team, recognizing that a process-mapping exercise would help clarify the reality, conducted a preliminary study and analyzed Armenia’s trade logistics supply chain. The team summarized the results of the study, together with recommendations for facilitating import/export-related procedures, in a “Trade Logistics Memo� that provided a bird’s-eye view of the trade logistics supply chain within Armenia. The memo became an excellent catalyst, sparking comprehensive discussions on the need to reform trade transactions by outlining the scope and scale of in-country bottlenecks. As a result, the client asked the team to prepare a more detailed and thorough process map to present a comprehensive picture of Armenia’s trade procedures covering all trade related agencies. (See Figure 1.) Requirements often caused delays of entire consignments. Lesson 2: To achieve quick wins, it is important to Photo Credit: Gagik Gabrielyan capitalize on client goodwill. When the client requested a detailed process map, the is critical. An extremely detailed mapping exercise can team capitalized on the goodwill — established through identify the exact pressure points. At the same time, you the initial interactions — to also focus on identifying issues have to closely adhere to the big picture so as not to slow and constraints that could lead to quick wins. The team down valuable reform momentum. This approach — followed a dual strategy — building the process map (see including both short-term wins and long-term dialogue — Figure 2), and simultaneously opening discussions about gave the Project credibility as well as the resources to tackle pressure points with different agencies to drive the reform more difficult reforms later in the cycle. process and maintain momentum. Completion of the detailed process map also had other The process-mapping exercise served as a vehicle for benefits. Some trade-related agencies did not see their intensive discussions with the Customs Service, the Ministry control functions as bottlenecks, because they believed of Economy, and business to press for key reforms. The their roles in the trade transaction process were minor. For choice to do in-depth analysis of the import/export process instance, the National Institute of Metrology was required Figure 1: Procedure Map: At the Customs Border SMARTLESSONS — JANUARY 2012 3 to inspect every imported measuring device at the point of entry. Goods subject to metrological control could be cleared only after successfully completing the certification process — that is, goods were detained at the customs border or customs warehouse until completion of the certification process. This requirement often caused delays of entire consignments of other goods, leading to increased costs for traders. The situation was similar for another technical control — mandatory certification (conformity assessment) of imported goods. Detailing this process and bringing these findings to the attention of the Ministry of Economy, the lead agency for Doing Business reform, galvanized its resolve to revise the laws. As a result, these two technical control procedures were reformed. Sampling, testing, and certification are now conducted once goods have cleared and been New procedures eliminate the requirement to sample transported to the importer’s premises, thus saving time and test all consignments at the border. and money for both businesses and inspection agencies. Photo Credit: Gagik Gabrielyan Mapping resulted in quick-win reforms in six technical control procedures, including certification of origin (see Box 2). also provided a bridge between different agencies with different points of view and became the go-to mediator. Lesson 3: To create strong partnerships that accomplish reform, you must build constructive relationships with At the beginning of Project activities, team members multiple agencies. realized that they had to establish real trust, especially with agencies (for example, Customs) that have a long history of Detailed and comprehensive mapping involved extensive viewing businesses with distrust and considering them interaction with multiple agencies. The Project adopted an primarily as a source of state revenue. The Project team amicable, relationship-based approach to interactions with worked on building trust through consistent communication, a mixed group of international and local experts. The team addressing problems, building capacity, and helping Figure 2: Procedure Map: Mandatory Certification of Imports SMARTLESSONS — JANUARY 2012 4 relevant agencies design reform measures. This was relatively easy, because the Box 2: Reforming Certification of Ori- implementation was led by local experts from gin Procedures the team — people who knew local practices, procedures, laws, customs, and, most Certification of origin of goods, a technical important, local attitudes. These experts, who procedure, was burdensome to traders, took on the role of insiders, were time-consuming, and costly, especially for complemented by the international expertise small and medium enterprises. Obtaining a that helped bring best-practice credibility to certificate of origin for only one type of a the exercise. product in a consignment cost approximate- ly $100 and took five days. All consign- Lesson 4: Be alert to certain pitfalls — such ments had to go through a physical inspec- as misperceptions and short-term “pain.� tion and testing process, adding further costs, including travel time for traders. The team had to work consistently to ensure that IFC was not perceived as predetermining Based on the Project’s recommendations outcomes. Sometimes the sheer push for (resulting from a detailed analysis), the gov- implementing reform was worrisome to the ernment reformed the procedure as follows: partners. The Project achieved credibility by communicating to counterparts that they 1. Reduced the costs of certification of ori- themselves were the decision makers. It was gin (both for testing and for issuing the important for IFC to be viewed as a facilitator certificate) from $100 to $50. rather than the change agent. 2. Reduced the need for testing by almost In some instances, it was necessary to help 50 percent by introducing testing on the those who experienced short-term losses basis of risk assessment. Rather than be- recognize the long-term benefits of the ing subject to testing with every consign- reforms. For example, reforming the procedure ment, a given product type will be tested for certification of the origin of goods (Box 2) only on the first occasion of export and caused reduction of fee revenue for the subsequently registered. Chamber of Commerce and Industry (CCI), which issues the certificates, and tested that 3. Increased the validity period of the certifi- group’s relationship with the Project. It was cate and testing report to one year, as- important to continually communicate clearly suming no changes are made to the to the CCI the benefits of the reform to all the product. parties — and that the effective use of a risk- based system would increase the overall 4. Reduced the duration of the certification efficiency of CCI operations and reduce costs. process from five days to three days, if This was particularly true with regard to products are tested, and within one day if excessive use of physical inspections and no testing is required. testing. The savings gained could be redirected toward the CCI’s core advocacy function. 5. Envisaged the possibility of the “produc- er (exporter) declaration� method for Conclusion certification of origin. Import/export procedures are complex and DISCLAIMER involve many different agencies and interests. SmartLessons is an awards In Armenia, detailed yet all-encompassing program to share lessons learned in development-oriented advisory process mapping was crucial for identifying services and investment where the real bottlenecks reside and for operations. The findings, designing solutions to mitigate them. It was interpretations, and conclusions also critical to build trust and constructive expressed in this paper are those relationships with state and other actors, for of the author(s) and do not necessarily reflect the views of IFC which a well-designed and consistent or its partner organizations, the communication strategy was of utmost Executive Directors of The World importance. This, combined with a quick-win Bank or the governments they strategy, catalyzed reform momentum and represent. IFC does not assume any responsibility for the resulted in significant improvements to completeness or accuracy of the Armenia’s trade transaction processes. information contained in this document. Please see the terms and conditions at www.ifc.org/ smartlessons or contact the program at smartlessons@ifc.org. 5 SMARTLESSONS — JANUARY 2012