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I
Malaysia Productivity Corporation
Draft Report
REGULATORY INNOVATION
OF CUSTOMS’ STANDARD
OPERATING PROCEDURE
(SOP) ON LMWs SCRAP
DISPOSAL
December 2016
PUBLISHED BY: MALAYSIA PRODUCTIVITY CORPORATION (MPC) Lorong Produktiviti, Off Jalan Sultan 46200 Petaling Jaya, Selangor Darul Ehsan, Malaysia. Tel : 603 – 7955 7266 / 7955 7050 / 7955 7085 Faks : 603 – 7957 8068 / 7955 1824 / 7954 0795 Emel : [email protected] Website : http://www.mpc.gov.my © Perbadanan Produktiviti Malaysia 2016 All right reserved No part of this publication may be reproduced, stored in retrieval system or transmitted, in any form or any means, electronics, mechanical, photocopying, recording, or otherwise, without prior permission of Malaysia Productivity Corporation. Disclaimer This report has been prepared by Malaysia Productivity Corporation from sources believed to be reliable but no responsibility is accepted by Malaysia Productivity Corporation, its employees, consultants, contractors and/or agents in relation to the authenticity, origin, validity, accuracy or completeness of, or for any errors in or omission form, the information, statements, forecasts, misstatement of facts, opinion and comments contained herein.
ISBN NO XXX–XXX–XXXX–XX–X
PRODUCTIVITY AND REGULATION
Productivity is the only driver of income growth that is unlimited, as opposed to resource exploitation
or increase in population and labour force participation, each of which faces natural limits. The potential
for productivity growth to generate higher income for Malaysians makes it a natural and important
consideration for decision makers. As such the continuing need to stimulate productivity rightly remains
at the forefront of government policies.
Regulation is the lifeblood of a modern, well-functioning economy. Almost all regulations have the
potential to impact on productivity, either through the incentives which they provide to businesses to
change operating and investment decisions, or more directly through their impacts on compliance costs.
It is inconceivable to think of a modern economy functioning without regulation. However, poor
regulation can cause frustration and unintended consequences, or simply add red tape that adds nothing
useful to the economy, society or the environment.
I
Terms of Reference
Background
In April 2016, PEMUDAH proposed that the Malaysia Productivity Corporation (MPC)
undertake a review of the burdens on business arising from the scrap disposal regulation.
Following consultation with stakeholders (Business, Customs, InvestKL), MPC is to report on
those areas in which the regulatory burden on business should be removed or significantly
reduced as a matter of priority and options for doing so.
Scope of the Study
The scope of this study covers scrap disposal procedures classified under categories 1 and 2
which is disposal of machines (<10 or > 10 years), rejected finished product/ raw materials/
work in progress and/or Sale of scrap resulting from such disposal (e.g. grinding / molding
defect), manufacturing waste / direct scrap; leftover materials which carry duties. Sample data
applications (June 2015 to June 2016) are collected from 16 LMW companies under RMCD -
WPKL principal customs area.
Scrap Disposal Procedures
1. LMW request to scrap and obtain scrap approval letter from Customs
2. LMW receive inspection and obtain scrap certificate from Customs
3. LMW submit K9 Form (pay duties) and obtain K9 approval from Customs
4. LMW notify completion of scrap disposal to Customs
II
CONTENTS
Terms of Reference i
Background i
Scope of the Study i
Executive Summary iii
Findings iii
Analysis iv
1 Introduction 1
1.1 Role of the Malaysia Productivity Corporation (MPC) 1
2 Business Concern 3
2.1 Long and uncertain approval timelines 3
3 Process 5
3.1 RURB Solutioning 5
3.2 Measuring Procedure and Time 5
4 Analysis 6
4.1 Unclear Client Charter 6
4.2 Changing Procedure from ISO to PTK 7
4.3 Customs Standing Order (PTK) Procedure “Inspection
Mandatory Requirement” 9
5 Costs to Business and Customs 10
5.1 Compliance Cost 10
5.2 Project Impact / Outcome 11
Appendix 1: Project Timeline (April 2016 – December 2016) 12
Appendix 2: Standard Cost Model (SCM) 13
DRAFT REPORT III
Executive Summary
The main objective of this project is to present on the initiative to innovate a new Customs’
procedure to improve the approval process of scrap disposal for LMWs under principal customs
area (PCA). The new SOP allows the LMWs to self-regulate the scrap disposal process and
improve Customs scrap disposal procedure, which will lead to enhanced efficiency and
productivity, as well as time savings and reduced compliance cost for both Customs (the
regulator) as well as for business (LMWs).
The collaboration between businesses and the regulator has proved to be vital in ensuring the
success of the pilot project. The results of the project were very positive and should be extended
to other qualified companies.
Findings
1. The range of scrap disposal approval time is from 1 day to 88 days. Based
on 470 applications sample:
Overall, 48% applications approved less than 10 days
100% approved less than 10 days under ISO procedure.
30% approved less than 10 days under PTK procedure.
2. Estimated Customs administrative costs is RM 496,807.00 per year.
Estimated Business administrative costs is RM 8.2 million per year.
Estimated Compliance costs saving RM 4.39 million per year.
DRAFT REPORT IV
Analysis
The engagements with stakeholders and analysis done resulted in the following options.
Business concern: Long and uncertain approval timelines
Assessment: Unclear Client Charter
Recommendation:
Codification of the current Client Charter.
Amendment to both client charter and processing and approval of application should be
incorporated into the Licensed Manufacturing Warehouse Unit client charter.
Assessment: Changing Procedure from ISO to PTK
Recommendation:
Change current SOP and change scrap disposal client charter to 10 days.
As indicated in the earlier figure above, analysis done for 16 LMWs indicated that during Oct
2013-June 2015, 100% cases could be completed/approved within 10 days. Thus it is obvious
that the main constraint lies in the current SOP based on PTK. Consideration to be given to
adopt back the ISO procedure as well as to setting a client charter of 10 days may significantly
lead to almost 100 percent of approvals in time.
Assessment: Inspection Mandatory Requirement under the PTK No. 27.
Recommendation:
Repeal mandatory requirement with risk-based or self-inspection.
Amendment of Customs Standing Order No. 27 on the mandatory requirement “shall be
witnessed by senior officers of the Customs” with other instrument/mechanism allowing
maximum flexibility among affected groups as to how they achieve compliance. This would
reduce the likelihood of such a long lead time in arranging for suitable time for both parties.
Among the options to be considered is applying risk-based inspection and introduce self-
inspection (for those low risk profile LMWs). Customs could revisit and look into “eliminating”
this mandatory requirement.
DRAFT REPORT 1
1 Introduction
Currently in Malaysia there is a total of 2,370 LMWs. Scrap disposal procedures are as outlined
in the Customs Act 1967. Licensed Manufacturing Warehouse (LMW) is defined as a premise
licensed under section 65 and 65A of the Customs Act 1967. It is documentarily controlled by
Royal Malaysian Customs and is subjected to all customs laws and regulations.1
A licensed Manufacturing warehouse (LMW) plays a crucial role in enabling manufacturing
process to be carried out in Malaysia. Warehousing is perceived today as one of the most
important functions in the supply chain for logistics and commerce. The objective of having
LMW is to empower manufacturer to set up its plant within the warehouse. It is fundamentally
intended to cater for the export oriented industries whose entire production or at the very least
80% are meant for export and subject to negligible customs procedures.
1.1 Role of the Malaysia Productivity Corporation (MPC)
Dealing with a range of authorities requires resources from the service provider, both in terms
of time and finance. In addition to the time required for the actual regulatory procedures, the
service provider also has to have knowledge on the requirements specific to its operations to
ensure that all relevant permits have been applied for. On the part of regulators they also have
challenges including lack of adequate resources for monitoring and enforcement. Beyond that
basic challenge of lack of capacity are lack of skills and competency, appropriate technology
to facilitate processes more efficiently, and financial resources to enhance overall governance.
With reference to the Eleventh Malaysia Plan (RMK11) Chapter 8: Re-engineering economic
growth for greater prosperity - Strategy A2, MPC has been tasked to undertake programme on
Sectoral Governance Reform. Accelerating Sectoral Regulatory Reform is one of the two
initiatives that MPC needs to carry out targeted to improve quality of existing regulations in the
selected sector.
Sectoral Governance Reform has been identified as a key policy lever in ensuring the
development of the services sector. The Blueprint recognised that reforms to the regulatory
environment have been a key part of the Government’s attempts to develop the services sector.
Chapter 7 of the Eleventh Malaysia Plan “Unleashing Growth of Logistics and Enhancing Trade
Facilitation”- Strategy Paper 14, highlighted that the issues in logistics and trade facilitation
can be summarised under key categories, namely institutional and regulatory framework,
infrastructure, human capital as well as technology adoption.
1 Guide on Free Industrial Zone & Licensed Manufacturing Warehouse, Jan 2016
Box 1: Strengthening Institutional and Regulatory Framework under Eleventh Malaysia Plan
The Logistics and Trade Facilitation Masterplan (2015-2020) has set 5 strategies, a pragmatic
approach to be adopted in developing the logistics industry and facilitating trade by undertaking the
following:
Strengthening institutional and regulatory framework
Enhancing trade facilitation mechanism
Building freight infrastructure efficiency and capacity
Deploying technology in the logistics chain
Strengthening capabilities of logistics service providers.
The initiatives outlined are aimed at strengthening the institutional structure and simplifying or
streamlining the regulations. This will help reduce inefficiencies, duplications and inconsistencies.
DRAFT REPORT 3
2 Business Concern
2.1 Long and uncertain approval timelines
Lengthy processing time for approval and complex procedures (Figure 1) leads to ineffective
implementation and causes delays that can be costly and inefficient for both industry and
government. In principle, regulators should be required to commit to clear and reasonable time
frames within 4 days as stated in the department’s client charter.
Delay in the approval process to dispose scrap can lead to considerable uncertainty for
businesses and result in significant costs or deferred opportunities. From the current review, an
example of the delay and uncertain timelines involved in scrap disposal approval processes
can fundamentally alter business operations in terms of utilisation of warehousing space. In a
number of cases, it has given a serious negative impact on the company’s image constraining
them to close the year-end financial account.
DRAFT REPORT 4
Figure 1: Scrap Disposal Approval Process Illustration
Source: JKDM SOP; MPC Analysis
DRAFT REPORT 5
3 Process
3.1 RURB Solutioning
The following process were used in the project:
– Establish baseline (current situation) through engagement with businesses. The main
activities were to understand and validate the issues;
– Engage with Customs to validate the issues;
– Engage with Customs together with businesses to discuss a solution objective, create
solution options and make a recommendation;
– Develop a new Customs SOP on scrap disposal procedures;
– Obtain agreement for a pilot project from Customs Management;
– Carry out pilot project for three months; and
– Gather feedbacks and lessons learned to improvise the SOP.
3.2 Measuring Procedure and Time2
Adapting from the World Bank methodology, the procedure and time are defined as below:
i. Time - Time is recorded in calendar days. The measure captures the median duration that
businesses indicate is necessary to complete a procedure in practice. It is assumed that the
minimum time required for each procedure is one day, except for procedures that can be fully
completed online, for which the time required is recorded as half a day
ii. Procedure - A procedure is any interaction of the company’s employees or managers, or any
party acting on behalf of the company, with Customs. Procedures that must be completed in the
same building but in different offices or at different counters are counted as separate procedures.
2 www.doingbusiness.org: Doing Business: Measuring Business Regulation (The World Bank annually reports
on a set of business considers the number of processes to be completed, the length of time these processes take,
and the cost of completion to portray the life cycle of a small to medium-sized domestic business) .
DRAFT REPORT 6
4 Analysis
4.1 Unclear Client Charter
Source: RMCD, Analysis MPC.
On analysis by the MPC team, it was noted that there are two client charters related to the
application for the disposal of the destruction of raw materials and components which is
i. Approval of application by Licensed Manufacturing Warehouse Unit within 3 working
days; and
ii. Processing of application by the General Exemption Unit within 4 working days.
Misinterpretation can create ambiguity and inconsistent interpretation of regulation by
regulators poses a burden to the business.
4.3.1 Option No. 1.
Codification of the current Client Charter
Amendment to both client charter and processing and approval of application should be
incorporated into the Licensed Manufacturing Warehouse Unit client charter.
DRAFT REPORT 7
4.2 Changing Procedure from ISO to PTK
The following four charts present the turnaround time to complete procedures for the selected
16 LMWs under JKDM-WPKL. Figure 2 depicts the overall performance in terms of approval
for the entire period under study (October 2013 – May 2016) followed by approval performance
for procedure ISO and PTK.
Figure 2: Root Cause Analysis of Selected 16 LMWs ( Oct 2013- May 2016)
Note: i) The t-value is -13.26001.; ii) The p-value is < .00001.; iii) The result is significant at p < .05.
230
107
69
14
37
5 4 2 20
50
100
150
200
250
No
. #
Ap
plic
atio
n
OVERALL
127
0
50
100
150
No.
# A
pplic
ation
Procedure ISO
103 107
69
14
37
5 4 2 20
50
100
150
≤ 10 ≤ 20 ≤ 30 ≤ 40 ≤ 50 ≤ 60 ≤ 70 ≤ 80 ≤ 90
No.
# A
pplic
ation
Approval Time (Days)
Procedure PTK
𝑥ҧ = 2
𝑥ҧ = 20
𝑥ҧ = 15
n = 343
Min = 1
Max = 88
n = 470
Min = 1
Max = 88
n = 127
Min = 1
Max = 9
Overall, from a sample of 470 applications, it was found that approval time ranged from a
minimum of one (1) day to maximum of 88 days, recording an average 15 days.
Analysis done for 16 LMWs indicated that overall for the period October 2013 to May 2016,
out of a total of 470 applications, 48% were able to be completed /approved not more than 10
days. During October 2013 to May 2015 100% were approved within 10 days. However during
June 2015- May 2016, only 30% were able to meet the 10 days. The low percentage completed
during the latter period was due to change in procedures after June 2015 (that of adhering to
Customs Standing Order (PTK)), resulting in lengthy turnaround time. Out of the 343
applications, minimum approval time was 1 day and maximum 88 days, giving an average of
20 days.
During October 2013 till May 2015, approvals were based on ISO procedure. On analysis on
the 127 applications in terms of ISO procedures, the approval time ranged from a minimum of
one (1) day and maximum of 9 days, presenting an average of 2 days.
4.2.1 Option No. 1:
Retain current SOP but change scrap disposal client charter
If the existing SOP is to be retained, the average time taken was 20 days. The client charter
needs to be looked into so that more applications can be approved within the stipulated time.
The client charter needs to be more specific in terms of the time approved for the application.
Herein lies the need to ensure all staff receive consistent work instructions when processing the
application. Review of the client charter is essential for continuous improvement to enhance
transparency and accountability.
4.2.1 Option No. 2:
Change current SOP and change scrap disposal client charter to 10 days
As indicated in the earlier figure above, analysis done for 16 LMWs indicated that during Oct
2013-June 2015, 100% cases could be completed/approved within 10 days. Thus it is obvious
that the main constraint lies in the current SOP based on PTK. Consideration to be given to
adopt back the ISO procedure as well as to setting a client charter of 10 days may significantly
lead to almost 100 percent of approvals in time.
DRAFT REPORT 9
4.3 Customs Standing Order (PTK) Procedure
“Inspection Mandatory Requirement”
The requirement under the PTK procedure has clearly mentioned that disposal for the
destruction of dutiable raw materials or components (e.g. fabric and finished goods that are
damaged) shall be witnessed by senior officers of the Customs. Due to this “mandatory
requirement”, LMW companies have to plan in advance to mitigate challenges in securing
availability of senior Custom officer’s time for on-site witnessing, verification and
endorsement.
It is to be noted that the preparation, processing and approval of the scrap disposal and sale are
very costly processes, both for the LMW and Customs administration. Where the administrator
spends more money on this administrative process than they collect in duties and taxes, then it
is not justifiable. Often, however, governments take the existence of their public services for
granted and do not perform regular cost benefit analyses to improve their efficiency and
effectiveness. Customs administration can also benefit from cost and time savings, enabling
them to re-direct resources into high-priority areas and other more revenue- earning activities.
4.3.1 Option No. 1.
Status Quo- Retaining the current SOP
If the current trend is to continue with existing practices, then the turnaround time will still be
lengthy. Business will continue to face delays and bear the unnecessary regulatory burden. A
big percentage of applications will still continue to be not in compliance with the client charter.
4.3.2 Option No. 2.
Repeal mandatory requirement with risk-based or self-inspection
Amendment of Customs Standing Order No. 27 on the mandatory requirement “shall be
witnessed by senior officers of the Customs” with other instrument/mechanism allowing
maximum flexibility among affected groups as to how they achieve compliance. This would
reduce the likelihood of such a long lead time in arranging for suitable time for both parties.
Among the options to be considered is applying risk-based inspection and introduce self-
inspection (for those low risk profile LMWs). Customs could revisit and look into “eliminating”
this mandatory requirement.
DRAFT REPORT 10
5 Costs to Business and Customs
5.1 Compliance Cost
MPC estimated the compliance cost to amount to RM 8.6 million.
Assume 2 LMW personnel with salary of RM 2,500 needed for scrap process application. So,
Estimated Administrative Cost to Business;
𝟐𝒑𝒆𝒓𝒔𝒐𝒏𝒏𝒆𝒍 × 𝑹𝑴 𝟐, 𝟓𝟎𝟎𝒂𝒗𝒈. 𝒔𝒂𝒍𝒂𝒓𝒚 × 𝟏𝟐𝒎𝒐𝒏𝒕𝒉𝒔 × 𝟏𝟑𝟖𝑳𝑴𝑾𝒔 = 𝑹𝑴 𝟖, 𝟐𝟖𝟎, 𝟎𝟎𝟎. 𝟎𝟎
While, Estimated Administrative Cost to Government (Customs) is calculated as
Administrative Costs;
𝟖𝒐𝒇𝒇𝒊𝒄𝒆𝒓𝒔 × 𝑹𝑴 𝟓, 𝟎𝟎𝟎𝒂𝒗𝒈. 𝒔𝒂𝒍𝒂𝒓𝒚 × 𝟏𝟐𝒎𝒐𝒏𝒕𝒉𝒔 = 𝑹𝑴 𝟒𝟖𝟎, 𝟎𝟎𝟎. 𝟎𝟎
Inspection Costs3;
𝑹𝑴 𝟎. 𝟕𝟎𝒑𝒆𝒓 𝑲𝑴 × 𝟕𝟎𝒂𝒗𝒈. 𝒅𝒊𝒔𝒕𝒂𝒏𝒄𝒆 (𝑲𝑴) × 𝟑𝟒𝟑𝒂𝒑𝒑𝒍𝒊𝒄𝒂𝒕𝒊𝒐𝒏 = 𝑹𝑴 𝟏𝟔, 𝟖𝟎𝟕. 𝟎𝟎
So, total administrative cost per annum = RM 496,807.00
3 Transport cost averaging 70 km for on-site inspection for 6 personnel in a year @ RM 0.70 per km
DRAFT REPORT 11
5.2 Project Impact / Outcome
Impact to Business and Customs
Business Customs
– Customs approval delays affect
stakeholder’s closing of final
accounts, resulting in negative
reputation of Malaysia.
– Loss of productivity due to
unproductive storage space
utilisation.
– High compliance cost for business to
comply with information obligation
from Customs regulation (include
time and money spent on paper work
in order to comply with the
regulation).
– Customs reputation tarnished due to
inability to meet Customs client
charter.
– Less effective and efficient allocation
of Customs’ resources (focus more
time on “low risk” activity,
disallowing customs to focus
energies on the “high risk” activity).
– Insufficient manpower to conduct
inspection and heavy workload.
– High administrative cost.
We assume 1 LMW personnel with salary of RM 2,500 needed for scrap process application.
So;
Estimated Administrative Cost (Business)
𝟏𝒑𝒆𝒓𝒔𝒐𝒏𝒏𝒆𝒍 × 𝑹𝑴𝟐, 𝟓𝟎𝟎𝒔𝒂𝒍𝒂𝒓𝒚 × 𝟏𝟐𝒎𝒐𝒏𝒕𝒉 × 𝟏𝟑𝟖𝑳𝑴𝑾 = 𝑹𝑴 𝟒, 𝟏𝟒𝟎, 𝟎𝟎𝟎. 𝟎𝟎
While, Estimated Administrative Cost of Customs is calculated as;
𝟒𝑪𝒖𝒔𝒕𝒐𝒎𝒔 × 𝑹𝑴𝟓, 𝟎𝟎𝟎𝒔𝒂𝒍𝒂𝒓𝒚 × 𝟏𝟐𝒎𝒐𝒏𝒕𝒉 = 𝑹𝑴 𝟐𝟒𝟎, 𝟎𝟎𝟎. 𝟎𝟎
(Assuming 4 personnel with an average monthly salary of RM5,000),
Inspection (Transport cost averaging 70 km for on-site inspection for 22 working days in a
month @0.70 sen per km)
𝑹𝑴𝟎. 𝟕𝟎𝒑𝒆𝒓 𝑲𝑴 × 𝟕𝟎𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑲𝑴 × 𝟑𝟒𝟑𝒂𝒑𝒑𝒍𝒊𝒄𝒂𝒕𝒊𝒐𝒏 = 𝑹𝑴 𝟏𝟔, 𝟖𝟎𝟕. 𝟎𝟎
So, total administrative cost per annum= RM 256,807.00
Thus total estimated compliance cost savings = RM 4.39 million
DRAFT REPORT 12
Appendix 1: Project Timeline (April 2016 – December 2016)
DRAFT REPORT 13
Appendix 2: Standard Cost Model (SCM)
Over the last few years the Standard Cost Model (SCM) has become the regulatory reform
tool of choice in EU and OECD countries for identifying and reducing regulatory compliance
costs. SCM provides a relatively simple methodology to measure and reducing
administrative burdens as it serves as a good starting point by showing which licenses and
which procedures are the most costly. The SCM is a method for determining the
administrative burdens for businesses imposed by regulation.
Box Item 2 : Which Cost Does the Standard Cost Model (SCM) Measure
The costs of regulation – financial and administrative
Regulation has a number of consequences for businesses. administrative costs are only
one type of costs that regulation can entail. figure 1 below illustrates the different types of
costs that regulation can impose on businesses.
Direct financial costs are the result of a concrete and direct obligation to transfer a sum of
money to the government or the competent authority. these costs are therefore not related
to a need for information on the part of the government. such costs include administrative
charges, taxes, etc. for example, the fees for applying for a permit would be a financial
cost of regulation.
14 DRAFT REPORT
Compliance costs are all the costs of complying with regulation, with the exception of
direct financial costs and long term structural consequences. in the context of the standard
cost model, these can be divided into ‘substantive compliance costs’ and ‘administrative
costs’. the scm does not focus on the policy objectives of each regulation. as such, the
measurement focuses only on the administrative activities that must be undertaken in order
to comply with regulation and not whether the regulation itself is reasonable or no.
Cost parameters:
For each administrative activity a number of cost parameters need to be collected.
Price: price consists of a tariff, wage costs plus overhead for administrative activities done
internally or hourly cost for external service providers.
Time, the amount of time required to complete the administrative activity.
Quantity: quantity comprises of the size of the population of businesses affected and the
frequency that the activity must be completed each year.
Combining these elements give the basic scm formula:
Cost per administrative activity (or per data requirement)
= (𝑃𝑟𝑖𝑐𝑒) × (𝑇𝑖𝑚𝑒) × (𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦)
Source: International SCM Network to reduce administrative burdens