Senate

Explanatory Memorandum

(Circulated by authority of the Minister for Justice and Customs, Senator the Hon Christopher Martin Ellison)

Schedule 1 - Cargo management re-engineering

1. Identification of the problem

The cargo management systems, processes and legislation used by Customs have developed over time in a piecemeal manner. While individually the systems for reporting and monitoring cargo movements and lodging import and export entries are considered to be amongst the worlds best, when considered as a whole they are not keeping pace with the changes and developments in domestic and international business practices. This will ultimately hamper the competitiveness of the Australian trading community through increasing costs and over-regulation. It will also add to the Governments cost in maintaining these systems.

Currently, the underlying principle to Customs legislation and processes is an inflexible one size fits all approach to cargo management. This means is that all import and export transactions are subject to exactly the same level of regulation, without any significant regard being given such factors as the type of goods being imported or exported, and the history of the clients dealings with Customs.

2. Specification of desired objectives

The objective of Cargo Management Re-engineering (CMR) is to reduce the costs and regulatory burden faced by industry in importing and exporting goods, while enhancing the Governments capacity to fulfil its community protection role.

2.1 Existing Regulations

The Customs Act is prescriptive in nature, providing detailed directions as to the character and manner in which cargo information is to be communicated to Customs. An example is the identification of specific computer systems to be used to provide information to Customs. As a result, the legislation has required regular updates to ensure that the processes and systems prescribed reflect the latest business trends.

The legislation also is inflexible in that it imposes the same level of regulation over both high risk, less compliant clients and low risk, highly compliant clients.

While Customs is the primary regulatory authority, it also administers import and export controls on behalf of other government organisations.

3. Options identified

3.1 Option 1 - Amend legislation to underpin risk managed, flexible cargo management processes and systems.

3.2 Option 2 - Introduce process and system reforms without complementary reform of the legislation.

This option would entail implementing reforms to cargo management systems within the limitations of current legislation.

4. Impact analysis

4.1 Impact Group Identification

Reform of cargo management processes and systems will have an impact on business, government and the community. Specifically the affected parties in business and government are:

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Business

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importers and exporters

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low risk and highly compliant importers and exporters ("accredited clients"), and

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other importers and exporters

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customs brokers

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the freight and transport sector

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shipping companies

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airlines

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container terminal operators

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stevedores

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warehouse operators

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freight forwarders

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air couriers

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port maritime authorities

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Government

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Customs

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ABS

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AQIS

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the Australian Taxation Office

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permit issuing authorities (PIAs).

4.2 Option 1

* Business

Benefits

Facilitation of Industry Development

Industry is rapidly redeveloping its business processes to take advantage of electronic commerce both at international and local levels. Legislative reform to remove the prescriptive nature of provisions for communicating with Customs will facilitate industry making full advantage of the opportunities offered by e-commerce.

Administrative Efficiencies

Periodic reporting and periodic payment of duty will result in administrative efficiencies for people identified as low risk to Customs, including a reduction in the number of entries lodged, a reduction in time devoted to submitting import and/or export entries and a reduction in communications costs. In addition, a single periodic duty payment will reduce the overall administrative burden associated with transactional payments. The extent of these savings will depend on the volume and type of imports and/or exports, the complexity of the relevant companys business systems, and the degree of involvement of government agencies with a company.

The improvements to Customs information technology systems will also allow importers to choose from a number of electronic options for providing particular information for particular imported lower value goods. The method of providing information in general will be based upon the value of the consignment - this is based upon the general rule that the lower the value of an importation the less information needed. The importing community will benefit through access to a wider range of electronic options, including the Internet, for providing information to Customs leading to faster access to goods.

In addition, the proposed simplification of Customs entry requirements for cargo transhipped through Australia will result in administrative efficiencies for imports and exporters.

Reduction in Communication Costs

Less prescriptive legislation coupled with an open communications gateway to Customs systems will allow the industry users of those systems to select a communications channel that best suits their commercial needs. Overseas experience indicates this will lead to a 30 to 40 per cent reduction in messaging costs.

Improved Resource Allocation

Periodic reporting of detailed trade data by preferred clients will alleviate the resource allocation problems faced by some businesses due to fluctuations in import and export activity from month-to-month.

Costs

Retraining

There will be costs associated with retraining personnel to familiarise them with the new reporting and payment procedures. Customs will publish instructional material and guidelines which will help reduce that cost.

Set-up of Computer Systems

There would be set-up costs involved for accredited clients in adapting their systems for periodic reporting and payment. Their decision will be based on the perceived commercial advantages they see in making the change. However if the companies choose to adapt their systems, up-front IT costs may be offset by a long-term reduction in IT communication costs, as discussed above.

Systems Review and Negotiations

The initial assessment of each business applying for the accredited client arrangements will be rigorous to enable all relevant government agencies to ascertain whether the applicant constitutes an acceptable risk. A significant time investment by relevant senior personnel of each applicant company will be required.

Cost Recovery Charge

Customs, in line with Government policy, will impose a cost recovery charge on the Request for Cargo Release that will replace an import entry for this class of client. (Note, a cost recovery charge currently applies to import entries.). There will also be cost recovery charges for processing declarations in relation to lower value imported goods. Liability for these will rest with the owner or the person making the communication depending on the nature of the declaration. Larger communicators may enter into arrangements with the Chief Executive Officer of Customs to remit changes payable over a particular period specified in the arrangement.

Electronic Reporting of Cargo

Currently cargo can be reported to Customs prior to its arrival or departure either as an electronic message or using documents. Customs is unable to effectively use its computer-based risk profiling tools on documentary reports. The CMR legislative reforms would introduce compulsory electronic reporting of pre-arrival and pre-departure cargo reports. There would be a cost associated with electronic reporting for some cargo reporters. Current figures show that less than 1 per cent of air cargo import reports are documentary, the figure is 5 per cent in respect of sea cargo import reports, and up to 50 per cent of pre-departure cargo reports for exports are documentary.

Reduction in the Warehousing of Goods

A reduction in the warehousing of goods is anticipated. In effect, since goods will be released before payment of duty, the requirement to move or store goods under bond will be eliminated for those who defer payment. This will lead to decreased business for warehouse operators.

Discharge/Unpack Reporting

The legislative amendment would formalise arrangements generally in place requiring stevedores and other terminal operators and depot operators to provide a report that assists Customs to identify surplus cargo. Surplus cargo is a term given to cargo not previously reported to Customs and is considered to be high risk until its bona fides can be established. The proposal is that the discharge/unpack reports would also be an electronic message.

There would be a cost involved for those businesses that currently fail to comply or a late in complying with the reporting arrangements.

* Government

Benefits

Improved Facilitation

One of the objectives of Customs is to facilitate the movement of legitimate international trade. Accredited client arrangements such as periodic returns and periodic duty payment will help Customs to achieve its objective. Separating the payment of duty from the clearance of goods from Customs control will streamline the physical movement of goods and assist in the speed of delivery of cargo.

Community Protection

Customs, AQIS and the PIAs have an objective of protecting the Australian community by preventing, or controlling, the entry or departure of goods that have the potential to adversely affect the community. The mandatory electronic reporting of cargo will help government agencies to achieve this objective through Customs being in a stronger position to undertake the necessary profiling and screening for high risk cargo.

Furthermore, the additional legislative requirement that Progressive Discharge Reports be provided to Customs will allow for the earlier identification of surplus, or potentially high risk cargo.

Cost Effective Use of Resources

The changed reporting requirements for those identified as being low risk to Customs will lead to administrative efficiencies for Customs as a result of a reduction in the number of entries lodged, a reduction in the time devoted to submitting entries and a reduction in messaging costs for Customs. The anticipated reduction in the warehousing of goods and underbond movements will enable a more efficient use of Customs resources. Overall, this will lead to a more effective deployment of resources in dealing with high-risk goods and a tighter focusing of compliance and processing resources.

Improved Data Integrity

Importers and exporters will be able to ensure that transaction details are correct before lodging data with Customs (and later forwarding to the ABS), which is likely to result in improved data integrity. This will mean that less resources will be devoted by Customs (and later the ABS) to post-transaction inquiries and amendments.

Increased Voluntary Compliance Levels

The co-operative nature of changed arrangements for low risk clients will lead to increased voluntary compliance levels which will benefit all government agencies concerned. It is anticipated applicants will address all areas of risk within their trading operations and raise their compliance levels before the assessment for eligibility to make periodic reports to Customs. There will also be incentives for brokers, freight forwarders and carriers to improve their operations to meet requirements for a client to participate in the changed arrangements, improvements that will carry over to their dealings with other importers/exporters.

Costs

Implementation Costs

There will be costs for Customs associated with implementing the new systems and processes. Customs intends to meet these costs from within its own resources.

Potential for Reduction in ABS ability to Service its Clients

Currently Customs provides data to the ABS for statistical purposes on a daily basis. The implementation of a periodic trade data return by accredited clients has the potential to result in some reduction in the ability of the ABS to satisfy client needs due to a reduction in the data collected. One criterion for acceptance to the accredited client arrangements is the clients demonstrated ability to provide data in a timely and accurate manner.

* Community

Benefits

In the medium to long-term, accredited client arrangements will benefit consumers indirectly by helping to maintain the international competitiveness of Australian industry. Consumers will also be safeguarded through rigorous assessments of applications for accredited client status. The increased knowledge of accredited clients regarding their regulatory obligations, as a result of the accredited client initiative, should lead to a decrease in the number of goods that are imported or exported in breach of legislation or international conventions.

Costs

There should be no direct costs for the community arising from Option 1 as the overall effect of this option is to reduce costs for Australias international trading community.

4.3 Option 2

* Industry

Benefits

Reduction in Communication Costs

Customs would be able to introduce an open communications gateway without amending the legislation. The new communications gateway would lead to reduced communication costs for industry because importers and exports would be able to select a communications channel that best suited their commercial needs. However, it is expected that any reduction in communication costs would be less than that available under Option 1 due to the prescriptive nature of the legislation.

Maintain Current Cargo Reporting Requirements

Companies could continue to choose how they communicated pre-arrival and pre-departure cargo reports to Customs, either by computer or document. There would not be any requirement, and associated costs, for documentary reporters to use computers to provide the necessary information to Customs.

Costs

Maintain Current Regulatory Burden

Option 2 would maintain the current one size fits all approach of the legislation. The inflexible one size fits all approach to the legislation provides no real scope for government to reward good corporate citizenship.

Retraining

There will be costs associated with retraining personnel to familiarise them with new systems. Customs will publish instructional material which will help reduce that cost.

* Government

Benefits

Maintain Status Quo

For agencies other than Customs, Option 2 would maintain the status quo. That is, there would be no need for those agencies to change systems or processes.

Costs

Less Cost Effective Use of Resources

Customs would be unable to effectively re-deploy resources on risk management principles as it would still need to allocate resources to low risk cargo management processes, such as consideration and approval of applications for routine movements of underbond cargo.

Less Effective Identification of High Risk Goods

Allowing industry to continue to communicate documentary cargo reports will hamper government agencies ability to identify and deal with high risk goods in a timely manner.

Implementation Costs (for Customs)

There will be costs for Customs associated with implementing its new computer systems. Customs intends to meet these costs from within its own resources.

No Incentive for Improved Compliance

The inflexible nature of the legislation does not provide any incentive for industry to voluntarily improve its compliance with the legislation.

5. CONSULTATION

Customs has conducted a program of wide and ongoing consultation for CMR. This is to ensure that the reformed processes reflect the needs of all government and industry organisations. Throughout the consultation process, industry and government have expressed support for Option 1.

Customs has utilised a three-tiered structure in order to conduct government and industry consultations. Customs has established the following groups for consultations with organisations external to Customs:

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an Industry Reference Group (IRG) comprising representatives from peak industry bodies and senior representatives from the international trading community; and

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a High Level Reference Group (HLRG) comprising representatives from Customs and other government agencies.

At a working level, key internal and other government agency stakeholders have provided personnel for the project to address areas of greatest relevance to them.

5.1 Industry Reference Group

Customs established the IRG in early 1999. The Managing Director of the Australian Stock Exchange Ltd (Mr Richard Humphry) chairs the Group and its members are drawn from the senior ranks of the importing, exporting and international trade service industries.

The organisations represented on the IRG include:

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AQIS/Industry Cargo Consultative Committee

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Association of Australian Ports and Marine Authorities

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Ansett

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Australian Chamber of Commerce and Industry

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Australian Customs Service

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National Farmers' Federation

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Austroads

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Australian Industry Group

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Australian Railways Association

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Australian Shipping Federation

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Australian Small Business Association

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Victorian Employers' Chamber of Commerce and Industry

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Federal Chamber of Automotive Industries

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Food and Beverage Importers Association

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International Air Couriers of Australia

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Australian Federation of International Forwarders

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Patrick Stevedores

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P & O Ports

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QANTAS

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Road Transport Forum

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Sea-Land (Australia) Terminals P/L

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Tradegate ECA

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Customs Brokers Council of Australia

The IRGs charter is to:

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provide high level strategic guidance to the project;

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identify areas where industry experts can work with the project team to greatest advantage;

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explore ways and means to gain efficiencies in cargo management through innovative and co-operative effort by all parties involved; and

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provide high level consultation and co-ordination to work towards achieving identified efficiencies.

Consultation with relevant companies and industry associations has continued throughout development of the CMR Project and in relation to proposed legislation to underpin it.

5.2 High Level Reference Group

The HLRG comprises senior personnel from the ABS, AQIS, the Department of Transport and Regional Services and Customs.

The role of the HLRG is to:

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provide a mechanism for consultation on the project within government; and

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ensure that the project encompasses the needs of relevant government agencies.

6. Conclusion and recommended option

6.1 Option 1 is the preferred option

Customs through the CMR project is seeking to introduce a more flexible approach to cargo management processes and systems, an approach that is clearly in line with stated industry requirements.

Implementing the systems reforms without changing the current legislative regime is not considered to be a viable option. This is because the present regulatory framework does not have the flexibility or scope to allow for the effective reform of government processes, hindering Customs ability to keep pace with the changes and developments in domestic and international business practices. For example, the manner in which clients communicate with Customs will be rigid and outdated in the modern environment. This will ultimately hamper the competitiveness of the Australian trading community through increasing costs and over-regulation. Furthermore, by failing to satisfactorily address the legislative issues surrounding cargo management, the Government would be undermining its position as a world leader in Customs.

6.2 Assessment of Effectiveness

As a result of the high level of consultation which has occurred throughout the CMR process, the proposed reforms to the systems and processes should reflect the needs of all government and industry organisations. In order to test the overall accredited client concept and overcome potential problems, Customs embarked on a pilot study with a small number of companies. Once the accredited client arrangements are in place, ongoing evaluation of the overall preferred client arrangements and individual agreements will occur.

In addition it is expected that the Australian National Audit Office will review the process adopted for the CMR Project.