Trade Facilitation Lendingthe World Bank–Recent Experience, Research, and Capacity Building Initiatives

TRADE FACILITATION LENDING BY THE WORLD BANKRECENT EXPERIENCE, RESEARCH, AND CAPACITY BUILDING INITIATIVESDraft Paper prepared for: The World Trade OrganizationWorkshop on Technical Assistance and Capacity Building in Trade FacilitationGeneva10-11 May 2001John S. WilsonThe World Bank This paper is a draft to be revised. The conclusions and opinions are those of the author and do not necessarily represent views of the World Bank. Questions may be addressed to John S. Wilson, Lead Economist, Development Economics Research (DECRG), the World Bank, 1818 H Street, N.W., Washington, D.C. Phone: (202) 473-2065, Fax: (202) 522-1159, email jswilsonworldbank.org. The assistance of Marc Plotkin in preparation of this paper is gratefully acknowledged. INTRODUCTION The World Banks work on trade is an important part of its mission in support of development and poverty alleviation. Trade has been an key engine for economic development over past several decades. Liberalization of international trade markets has had a strong positive effect on economic growth, including in the developing countries. For a recent overview of trade and development, including work of the World Bank see; Leveraging Trade for Development: World Bank Role, prepared for the Development Committee paper, April 3, 2001 and Global Economic Prospects and Developing Countries, 2001, The World Bank. Efforts to integrate developing countries into the trading system and multilateral framework established in the World Trade Organization, as liberalization continues, should include a renewed focus on trade facilitation. As part of the work toward this goal, the World Bank supports trade policy reform and implementation of Uruguay Round commitments by developing countries in several areas directly related to (1) accelerating transparency and modernization of customs, (2) regulatory reform and standards, and (3) expansion of transport access and infrastructure modernization among others. The Banks work program on trade specifically focuses on these areas from a development context as a primary objective. For example, the institutions project lending supports government institutional reform and infrastructure and facility modernization related to health, safety, or environmental goals. In addition, efforts are underway to more closely tie capacity building and development objectives with advantages of deeper integration into the world trading system. Source: Wilson, John S. The Development Challenge in Trade: Sanitary and Phytosanitary Measures, submission by the World Bank to the WTO, Document No. G/SPS/GEN/195 (July 12, 2000). This paper provides an overview of the World Banks lending program related to trade facilitation. It is not a comprehensive review of all trade-related lending by the Bank in this area, but rather provides examples of how the Bank supports liberalization through projects which support facilitation measures. Part I sets forth the basic principles of trade facilitation that have been promulgated by the World Trade Organization. Part II provides an overview of the Banks lending in trade facilitation over the past decade. Part III reviews lessons in trade facilitation that have been highlighted from earlier lending projects. Part IV describes in detail seven trade facilitation projects that the Bank has started since 1998, all of them currently active in 2001. Part V briefly summarizes the challenges that the Bank and other organizations will have to address in the coming years.BACKGROUND: BASIC PRINCIPLES AND BUILDING BLOCKSThere is no single definition of trade facilitation. The term generally refers to the simplification of procedural and administrative impediments to trade, such as customs administration, licensing procedures, standards and technical regulations, and barriers to the mobility of businesspeople. Several fundamental principles have emerged which serve as the basis for trade facilitation: transparency, due process, non-discrimination, least-trade restrictiveness.These principles are derived from the text of the Uruguay Round Agreements, in particular: Articles VIII and X of the General Agreement on Tariffs and Trade, the Technical Barriers to Trade (TBT) Agreement, and the Agreement on Sanitary and Phytosanitary Measures (SPS). The text of the WTO agreements are available at http:/www.wto.org. These principles are fundamental building blocks for reform and should form the basis of long-term liberalization efforts. This will require sustained efforts involving work to implement current trade obligations as a key priority.Article VIII addresses fees and formalities connected with trade. It sets out a WTO members basic obligation to minimize the number and diversity of border measures that can have the effect of restricting or distorting trade. Such measures can include: fees (other than normal customs duties and taxes), quantitative restrictions, licensing, documentation requirements, and quarantine measures. Article X requires that members publish all of their laws and regulations that pertain to importation and exportation. Two additional parts of the Uruguay Round Agreements are central to trade facilitation and must be considered within the broader context of future liberalization measures. The Technical Barriers to Trade (TBT) Agreement requires that member states not promulgate technical regulations that create unnecessary obstacles to trade. This means that any technical regulation adopted by a member state shall not restrict trade any more than is necessary to fulfill a legitimate objective, such as protecting national security or the public health. Article 4.1 of the TBT Agreement mandates that member states work toward adopting internationally accepted standards. The Agreement on Sanitary and Phytosanitary Standards (SPS) requires that sanitary and phytosanitary measures promulgated by member states be necessary to protect plant and animal life, based on scientific principles, justified by sufficient scientific evidence, and not be applied in a manner which would constitute disguised trade restrictions. THE WORLD BANKS TRADE FACILITATION WORK PROGRAM: SELECTED EXAMPLESOverview. In the six years since the implementation of the WTO agreements, the World Bank has continued to be active in trade-related lending. Through the mid-1990s, trade-related lending focused largely on border liberalization measures, such as quantitative restrictions, duties, subsidies, export financing, and customs. More recently, however, bank policy lending has been targeted at “second generation” trade facilitation measures, such as privatization, public enterprise restructuring, and regulatory reform. World Bank Report, Trends in World Bank Trade-Related Lending Part I, (May 4, 2000). These issues are becoming more important as tariffs fall and supply chains integrate production and trade around the world.In fiscal year 1999, 64 out of the Banks 212 lending projects had trade-related components, and twelve of those were entirely trade-related. The projects centered on a wide range of specific sectors, including public sector management, agriculture, industry, finance, and urban development. Ibid. In adjustment lending, trade facilitation lending primarily covers reforms in customs, regulatory frameworks, and standards. During fiscal year 1999, the bank extended 15 adjustment loans with components addressing customs reform, 17 with components covering standards, and 14 with components dealing with legal and regulatory reform. World Bank Report, Trends in World Bank Trade-Related Lending Part II (May 8, 2000). Project lending focused on export promotion, legal reform, strengthening of trade-related public institutions, and support for new product development and marketing. Ibid. In Fiscal Year 2000, there were approximately 232 lending operations for a total of $15.3 billion dollars ($10.9b IBRD and $4.4b IDA). Project lending in IBRD loans amounted to 59 percent of the total and adjustment loans to 41 percent. Estimates indicate that 13 projects totaling $650 million were focused on overall trade promotion and facilitation goals. In addition, the Bank supported projects targeted at privatization and reform of public utilities, financial institutions and other public entities in which privatization creates conditions in which trade expands.During FY 2000 and as of March 2001 in FY 2001, there were 18 projects primarily concerned with trade facilitation, and 16 other projects that had at least one trade-facilitation component. World Bank Report, Trade in World Bank Project Lending FY 00 and FY 01 (March 26, 2001). Understanding the Dynamics of Trade Facilitation and Development in the Asia Pacific. To further the development dimensions of trade facilitation and examine problems and prospects of trade facilitation in Asia Pacific Economic Cooperation (APEC), the Bank, together with the Government of Canada and the Asia Pacific Foundation of Canada, organized a workshop in Singapore in September 2000, focusing on “new directions and the development challenge” for APECs trade facilitation agenda. Two of the four areas that the workshop focused on were customs procedures, and standards and technical regulations. For additional background on the work, from a development context, see: “Facilitating Asias Trade: A Role for Development Cooperation, Assanie, Nizar, Michel Hardy and Mariette Maillet, Canadian International Development Agency, discussion paper prepared for the APEC workshop on Trade Facilitation, September 6, 2000, Singapore, September 2000. Themes that emerged from the workshop included: (1) the need to build on complementarities and synergies in trade facilitation across different sectors, which argues for a horizontal approach to facilitation issues within APEC, (2) the importance of involving the private sector in APECs trade facilitation efforts; and the developmental impact of trade facilitation and, (3) the fundamental role of technical assistance in helping less-developed economies implement facilitation measures. For additional background see: Cutting Through Red Tape: New Directions for APECs Trade Facilitation Agenda, Yuen Pau Woo and John S. Wilson, Asia Pacific Foundation of Canada. See also the World Bank website at: www.worldbank.org/standards for conference papers and background material. The Bank is currently considering projects to expand upon the work undertaken in the APEC region. Global Facilitation Partnership for Transportation and Trade. In June 2001, the Bank will host a conference sponsored by the Global Facilitation Partnership for Transportation and Trade (GFP). This initiative is a Bank-sponsored consortium of public and private sector organizations whose collective mission is to reduce or eliminate impediments to cross-border transportation, thereby facilitating trade and alleviating poverty. The principle objectives of the GFP include: the establishment of a comprehensive Facilitation Audit Framework, combining qualitative assessment with a simplified set of data on efficiency of trade and transport transactions; the definition of systematic approaches to measurement, based on a set of facilitation indicators on transportation and cross-border processes, to be systematically collected; the monitoring and publishing on a regular basis of data on these facilitation indicators; and any commonly agreed initiative aiming at promoting trade and transport facilitation programs through education, training, and targeted technical assistance activities. Global Facilitation Partnership, Memorandum of Understanding, available at www.worldbank.org. Among the projects initiated by the GFP is a trade and transport facilitation project that is being implemented in Albania, Bosnia, Bulgaria, Croatia, Macedonia, and Romania simultaneously. This project, if successful, will substantially integrate the transportation infrastructures of these six Southeast European nations.TABLE 1: Selected Trade Facilitation Project Lending by the World Bank Sources: World Bank Report, Trends in World Bank Trade-Related Lending Part I, (May 4, 2000); World Bank Report, Trends in World Bank Trade-Related Lending Part II (May 8, 2000); World Bank Report, Trade in World Bank Project Lending FY 00 and FY 01 (March 26, 2001); Wilson, John S. “The Development Challenge in Trade: Sanitary and Phytosanitary Standards,” Paper submitted to the Committee on Sanitary and Phytosanitary Standards of the World Trade Organization, Geneva (June 21, 2000). Country Project NameTrade-Related ComponentsDatesAmount*TransitPoland Port ModernizationUpgrading physical and managerial infrastructure of port facilities2001-$38Mozambique Rail and port restructuringIncreasing port-rail system efficiency to accommodate freight2000-$100Honduras Rural and main roadsRepair and improvement of trade corridors damaged by hurricane2001-$66Nicaragua Road rehabilitationInfrastructure improvement along international trunk road corridors2001-$75CustomsSix Southeastern European countries Transport facilitationStrengthen and modernize customs administration1999-$78.4Tunisia Export developmentStreamline and modernize customs procedures1998-$35StandardsTurkey Agricultural researchLaboratories and residue control modernization1992-1999Poland Agroindustries exportingFood processing facilities modernization1990-1995Madagascar Rural developmentLivestock vaccination1980-1988Guatemala National competitivenessCertification and product quality evaluation programs2001-$20*Hungary Municipal waterReduction of Danube River pollution to comply with EU standards2000-$88.9Regulatory ReformGuatemala National competitivenessRegulatory reform in the area of competition policy2001-$20*Algeria Privatization assistanceStrengthening regulatory capacity to facilitate trade2000-$5India TelecommunicationsStrengthening regulatory framework to enhance private investment2000-Malawi Utility privatizationStrengthening regulatory framework in telecommunications & electricity sectors2000-$28.9* Not available * In US$ millions *Represents total project loan, not individual component.LESSONS LEARNED FROM PAST BANK PROJECTSEvery lending project undertaken by the bank presents unique circumstances, and this is certainly true in the area of trade facilitation. While it is difficult to draw universal lessons from these projects, there are certain experiences that will determine the success or failure of a loan in a particular context. Some of these lessons were learned in earlier trade facilitation projects undertaken by the Bank.Highly Successful Projects. In one example, a loan to Sri Lanka from for telecommunications reform was rated as highly satisfactory. The loan was approved in 1991 and the project closed in 1998. A key lesson learned in this project was that labor unions should be involved at the early stages of reform, and their concerns should be considered in order to reduce resistance to reform. Another lesson drawn from this project was that the successful private operation of value-added and other marginal telecommunications services creates new job opportunities. This may reduce staff fears of privatization as well as provide comfort to potential investors who observe a track record of commercial operations and the workings of a sound legal and regulatory framework. Third, full corporatization with private management and suitable regulation provides the autonomy needed to quickly expand service and to become more consumer-oriented and competitive. World Bank, Sri Lanka Second Telecommunications Project, Implementation Completion Report No. 18746 (December 23, 1998). A transit facilitation project for Macedonia from 1995 to 1999 was likewise rated as highly satisfactory. The Customs Administration in Macedonia was recognized throughout the region for its customs reform process. World Bank, Macedonia Transit Facilitation Project, Implementation Completion Report No. 19408 (June 24, 1999). Satisfactory Projects. A lending project in Morocco that took place between 1991 and 1998 for port revitalization was rated as satisfactory. One of the lessons drawn from the implementation of this project was that trade facilitation is too complex to be handled in a sub-sector project, unless a process is defined at appraisal, responsibilities are clearly apportioned, the objective is actively endorsed by key players, and private sector constituencies already favor the reforms. World Bank, Morocco Ports Sector Project, Implementation Completion Report No. 18764 (December 28, 1998). A similar port modernization loan to Pakistan during that same time frame was also rated as satisfactory. The key lesson drawn from this project was that trade facilitation requires high-level support. World Bank, Pakistan Karachi Port Modernization Project, Implementation Completion Report No. 18766 (December 30, 1998). Partially Successful Projects. A loan to Bolivia from 1990 to 1998 for private enterprise development was rated as partially satisfactory with specific components rated as follows. Among the relevant project components, the regulation component was rated as partially satisfactory while the privatization component was rated as highly satisfactory. Institution building is a long and complex process. Delays should not be viewed as conclusive evidence of implementation failure per se where a project is achieving substantive institutional change. Limited interventions in institution-building projects are acceptable only if they form one part of a larger program. World Bank, Bolivia Private Enterprise Development Project, Implementation Completion Report No. 19075 (May 20, 1999).Lessons Drawn from These Projects. While neither comprehensive nor conclusive, the foregoing examples do suggest some of the factors that contribute to a successful trade facilitation-lending project. Among those critical lessons are: involve the stakeholders at early stages, establish independent regulatory institutions, and privatize industrial sectors in order to allow competitive enterprises to develop. With these factors in consideration, the next section examines several of the Banks active lending projects in the area of trade facilitation.ACTIVE LENDING PROJECTS IN TRADE FACILITATIONPROJECT 1: EXPORT DEVELOPMENT IN TUNISIA World Bank, Project Appraisal Document on a Proposed Loan to the Republic of Tunisia for an Export Development Project, Report No. 18778-TUN (April 30, 1999).Objective. The lending project was designed to address, in part, Tunisias inadequate trade facilitation mechanisms. At the time this project was devised, Tunisia was facing significant competitive challenges as a result of accession to the World Trade Organization and the Free Trade Association with the European Union. Although its offshore sector had been doing well, traditional exports had been facing severe competition. This was due, in large measure, to significant weaknesses throughout Tunisias export infrastructure. Foremost among these problems was the clearance of goods from the docks. The average time taken to clear goods after they have been unloaded from the vessel was 8 days, and in some cases, 18 days. Not only were these delays costly in financial terms, but they made it impossible for exporters to quickly respond to sudden orders. Responsiveness was also impaired by high order execution cycle times, inefficient supply chains, cumbersome procedures, limited domestic infrastru