Supply Chain Security Strategy

Proposed Framework for Pakistan

Expanding CSI-SFI in Pakistan

Exports to US

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This policyproposition has been prepared for stakeholder debate on the implementation of IC3/SFI implementation in Pakistan, up-to-date developments in bilateral negotiations on its expansion to sea-terminals in Karachi, its co-relation with international supply chain security standards, and its implications for the segment of domestic industry engaged in export trade with the US.

What is SFI?

Safe Freight Initiative (SFI) is the second-generation maritime cargo inspection and clearance system, introduced by the Department of Homeland Security (DHS) in 2006. SFI is a successor to CSI or Container Security Initiative, and has been launched against the perspective of the US SAFE Ports Act 2006, which mandates hundred percent inspection of maritime cargo at foreign ports ahead of entry into the US.

The primary objective of SFI is to protect the bilateral trade lanes between the US and its trading partner countries. It is estimated that around one-half of the incoming US trade arrives by containers onboard ships. Nearly seven million cargo containers are offloaded at US seaports each year. With the onset of terrorism as a global phenomenon, the vulnerability of international shipping and the need to safeguard it have become especially acute.

SFI distinguished from CSI

SFI and CSI are parallel supply chain security paradigms enforced by the DHS. Both were introduced in response to the terrorist attacks of September 11, 2001 and are underpinned by similar considerations of maritime cargo security. CSI was announced in 2002 to safeguard maritime cargo movement between the US and its global trading partners. At present, CSI is operational at 47 ports in North America, Europe, Asia, Africa, the Middle East, and Latin America (See Annex I for details).

SFI was launched in 2006 to deepen the scope of cargo inspection and security at foreign ports in terms of the hundred percent scanning principle embodied in the SAFE Ports Act, 2006. In its pilot phase, SFI was introduced at six foreign ports: Port Qasim in Pakistan; Puerto Cortes in Honduras; Southampton in the United Kingdom; Port Salalah in Oman; Port of Singapore; and the Gamman Terminal at Port Busan in Korea.

CSI and SFI are built around the following core principles:

•             Identification of high-risk containers that pose a potential risk through customs-to-customs advance sharing of information and intelligence.

•             Prescreening and evaluation of containers before they leave the port of shipment.

•             Use of advanced technology to prescreen high-risk containers through large-scale X-ray and gamma ray machines and radiation detection devices.

•             Use of smarter, tamper-evident containers.

While CSI and SFI are identical, the only difference between them is that SFI extends the scope of cargo inspection under CSI to one hundred percent, as required under the SAFE Ports Act 2006, prior to shipment from a foreign port to the US. There is no other notable difference between the two.

SFI & IC3 Programme

Under the SFI operational methodology, the USCBP personnel jointly inspect risky containers with the host Customs authorities. In the case of Pakistan, this conditionality was never pressed into service right from the outset, so that Pakistan Customs control and supervise SFI operations at Port Qasim through its own personnel specially trained for the purpose. The SFI operations are carried out in Pakistan under a special dispensation, known as the Integrated Cargo/Container Control Programme (IC3).

The IC3 Programme is structured around the following principles:

•             100% examination of US-bound export cargo from the port(s) of shipment in Pakistan through non-intrusive inspection (NII) technology, i.e. radioactivity detection portals and x-ray machines operated by Pakistan Customs.

•             Physical examination of cargo (through Pakistan Customs officials) only in such cases where export declaration is found deficient in the light of USCBP acceptance criteria (threshold violation).

•             Exemption to Pakistani export cargo from inspection at ports of arrival in the US, except in extraordinary circumstances, such as (i) intelligence information on contraband concealment in cargo; (ii) breach of the security seals en route etc; and (iii) some sus[icion against US importer.

•             Sharing of cargo examination results by Pakistan Customs with the USCBP via internet.

•             Real-time clearance of Pakistan export cargo by USCBP at Port Qasim on completion of the inspection procedures.

The Declaration of Principles for the IC3 Programme was signed between Pakistan and the US in March 2006 during the visit of President Bush to Pakistan. The IC3 operations are carried out at a purpose-built terminal at Port Qasim, constructed at a cost of US$ 4.3 million by FBR, with an equal investment of US$ 4.3 million by the USCBP in terms of the deployment of detection and communications equipment.

The IC3 Terminal was inaugurated by Prime Minister Shaukat Aziz on 31-03-2007. Earlier, the Federal Cabinet accorded approval to the implementation of the IC3 Programme on 13-02-2006. This was preceded by multiple rounds of stakeholder consultations coordinated by the Ministry of Commerce, and the resultant consensus on the issue.

Benefits of IC3 Programme

•             Single-stop Customs clearance for US-bound exports from Pakistan.

•             Fulfillment of US inbound cargo clearance requirements set out in the SAFE Ports Act at national port(s) in Pakistan.

•             Use of sophisticated technology for Customs examination and clearance of export cargo (average clearance time for a ‘clean container is 15-20 minutes).

•             Savings to Pakistani and US businesses as a result of non-intrusive inspection at ports of shipment and landing (cargo de-stuffing  charges at US ports range from $1500-3000 per TEU ).

•             Zero clearance time for clearance of Pakistan export cargo at US ports (except where seal integrity is found to have been compromised in transit).

•             Ideal for just-in-time export shipments from Pakistan to the US.

•             No scanning charges for export consignments at Port Qasim, which range from $60-150 per TEU at transshipment ports like Salalah.

•             Direct shipping service from Port Qasim to the US in the wake of the IC3 Programme. Previously, such cargo was carried to transshipment ports, such as Dubai, Colombo, etc, for scanning by USCBP, and then shipped to the US.

•             Implementation of international supply chain security standards in Pakistan, such as those laid down under the World Customs Organization’s SAFE Framework of Standards to Secure & Facilitate Global Trade.

•             Enhanced trust in Pakistan’s commitment to interdict illicit cargo movement in the garb of commercial trade.

SFI/IC3 Expansion in Pakistan

a.          Current Scenario

Shipments of Pakistan export cargo are routed through three terminals in the country:

•             Qasim International Container Terminal (QICT)

•             Pakistan International Container Terminal (PICT)

•             Karachi International Container Terminal (KICT)

Of the three listed above, only QICT is SFI-compliant, while the others are not. As a result, all US-bound cargo shipped from PICT or KICT for US destinations is inspected at foreign transshipment ports in the same manner as at Port Qasim, and allowed for shipment to the US only after such a process is completed in all respects. This scenario has the following disadvantages for Pakistani exporters:

a.            Potential delay in the shipment of just-in-time consignments to the US buyers. Due to the very nature of indirect shipment to the US destinations, and the involvement of cargo unloading and re-loading at intermediary ports, cargo clearance is naturally a protracted exercise. At many transshipment ports, the scanning facilities are located at some distance from the berths, resulting into longer dwell time at such ports, and longer voyage from origin to destination.

b.            Additional costs to the Pakistani exporters on account of scanning charges levied at foreign transshipment ports and/or related charges in cases of re-examination of goods by the USCBP.

c.             Inconvenience and extra costs to the Pakistani exporters if the USCBP does not permit a container to be loaded on to a ship for any reason, e.g. anomaly in cargo contents vis-à-vis the declaration made by an exporter. In such a scenario, the container has to be perforce shipped back to Pakistan. At Port Qasim, Pakistan Customs resolves such anomalies in consultation with the exporter to the satisfaction of the USCBP.

d.            At all foreign transshipment ports, the US-bound cargo clearance is a matter to be resolved among the shipping line (representing the exporter) and the USCBP. At Port Qasim, this is a matter to be jointly handled by the Customs authorities of Pakistan and the US.

e.            Since SFI/IC3 is operational only at the Port Qasim, an exporter usually prefers its US shipments to be routed through the QICT. This scenario has resulted into business diversion away from the PICT and KICT to the QICT, creating an undesirable monopoly in favour of it, which needs to be rectified in view of the imperatives of equal business opportunities for all terminals.

b.           State of Bilateral Negotiations            

In the wake of the SAFE Ports Act, 2006, USCBP has the mandate to ensure that only such cargo is allowed clearance through the US ports, which has been examined one hundred percent at the foreign port, or at the transshipment port, or is, otherwise, fully examined at the port of arrival in the US (implied costs for the US importer and clearance delays). GoP should interact with USCBP in terms of the Declaration of Principles signed with Pakistan in 2006 for the expansion of SFI to KICT and PICT. In such parleys, the following scenarios could be likely:

i.              Establishment of a second IC3 Terminal at the Karachi port

This proposition meant creation of a second IC3 Terminal at the Karachi port, which would provide an advance common staging post for the clearance of US-bound cargo routed through the KICT and the PICT for ultimate shipment to the US.

ii.             Establishment of IC3 Processing Lanes at KICT and PICT

The second proposition floated by the KICT and PICT could be setting up of dedicated cargo processing lanes at the selected sites in the two terminals. This proposition, in effect, means:

a.            earmarking separate area in the two terminals for building IC3 cargo lanes, radio portal monitor and x-ray scanner sites, and the IC3 Control Room.

b.            financing the creation of these facilities exclusively by the terminal operators with no cost to the GoP.

c.             provision of non-intrusive inspection and communication systems by the USCBP.

On its part,

a.            KICT should set up the IC3 processing lane at two potential sites within its terminal: one, within the KICT premises and the other at TPX off-dock. Once approved to be built, this facility will cater to around 26,000 TEUs or more per annum;

b.            PICT could set up the IC3 processing lane within its bonded premises along with a dedicated gate for the IC3 traffic. If approved to be built, this facility will cater to around 3,900 TEUs or more per annum.

Contemporary Supply Chain Dynamics

The international supply chain dynamics have undergone a sea-change in the post 9/11 world. It is no more the responsibility of the Customs administration of the importing country alone to ensure that nothing prohibited under its national laws crosses it frontiers; it is the responsibility of the Customs administration of the exporting country as well that nothing is allowed clearance, which poses a potential threat to the international supply chain security.

Elaborate Customs standards on supply chain security are embodied in the World Customs Organization’s SAFE Framework of Standards to Secure & Facilitate Global Trade. Pakistan has signed the Letter of Intent to progressively implement the aforesaid international instrument.

The concern on preserving the international trade lanes is equally evident in a plethora of supply chain security initiatives launched by the WCO and the USCBP. These include, inter alia:

i.              C-TPAT (Customs Trade Partnership Against Terrorism): Under this initiative, the USCBP verifies the implementation of elaborate in-house security measures by a foreign manufacturer engaged in trade with US companies. The export shipments of C-TPAT-compliant manufacturers are assigned lower risk scoring by the USCBP on arrival at US ports, leading to their expeditious clearance.

A substantial number of manufacturers in Karachi, Lahore, and Faisalabad are C-TPAT-compliant, but such certification comes at a cost arising from the fulfillment of all the standards prescribed by the USCBP.

ii.             AEO (Authorized Economic Operators): Business accreditation programmes by national Customs administration, based on the maintenance of transparent record-keeping, accounting, banking and fiscal transactions, in addition to automated procedures, and physical security infrastructure at the manufacturing premises, all demonstrating commitment to genuine commercial operations. In addition, an AEO must provide unfettered access to Customs to scrutinize its transactions, records, and operations at any given point in time in return for expeditious Customs clearance of its import and export cargo. AEO certification entails investment by a manufacturer desirous of obtaining it, which again involves one-time and/or recurring expenditure in the course of business.

iii.            Mutual Recognition Arrangements (MRAs): Under these arrangements, the Customs administrations of the two trading partner countries accord preferential clearance to the AEOs belonging to each other’s country. Such MRAs are based on consensual AEO certification standards and joint monitoring of AEO performance requirements and sharing of information about them.

The common features of all the supply chain security initiatives enumerated above include:

i.              Cost of acquiring and maintaining certification by manufacturers eligible for such certification. While the large-scale industry may not find it difficult to acquire such certification, small-to-medium size businesses might be left out altogether due to financial constraints.

ii.             Regular interaction with national or foreign Customs for fulfillment of the certification criteria.

iii.            Individual handling and resolution of certification issues by the compliant businesses with the respective Customs administration(s).

By contrast, the parallel supply chain security initiatives, such as CSI or SFI provide a universal cargo clearance facility to exporters of all sizes, established or new-comers, regulars or intermittent ones, manufacturers or vendors, without entailing any investment cost for them, apart from the other benefits listed above. It would be important to add that these initiatives are, in fact, complementary to SFI/CSI, and are co-extensive with them, though their utility in serving as a means for earning or imparting security certification on a business engaged in trade with a US company differs.

To illustrate, in order to obviate delays in sourcing from non-certified suppliers abroad, and to add certainty to just-in-time shipments from them, many US buyers insist that such a supplier must be C-TPAT certified in the first place, or that it must be located in a region closest to an SFI port. The consequences of sourcing supplies from non-certified vendors could range from delays to disruptions in the supply chains, all of which militates against sound business sense for an importer based in the US when it comes the selection of the right source from amongst the global community of suppliers.

The way forward

Going by the dynamics of international trade with the US, which, incidentally, constitutes the single biggest market for Pakistan’s export products, there is hardly any need to emphasize the importance of the institutional mechanism for the smooth flow of goods from Pakistan to the US markets. Such an objective is consistent with the imperatives of -

•             expansion of trade with the US and the necessity of retaining market share held by the domestic industry.

•             integration of the planned ROZs with the rest of the country, and providing the goods produced there with a smooth and standards-compliant Customs clearance mechanism at national sea-ports.

•             allowing a level playing field to all private sea terminals in the country, and to enable them to receive return on their respective investments in the expansion of infrastructure at their ports, and simultaneously to attract business from other ports in the region, which are not SFI-compliant as yet.

The most important aspect of the entire debate remains that economic growth must be treated at par with national security, and should, therefore, be addressed as such, by preparing for and proactively addressing the evolving challenges of contemporary global trade.

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