78406 POLICY NOTE NO. 37 MAY 2013 Africa Trade Policy Notes Where Informal Procedures are Quasi-Formal – Cross- Border Trade between West and Central Africa By Mukhtar Amin and Mombert Hoppe Introduction HIGHLIGHTS The border between Cameroon and Nigeria is also the border between West and Central Africa and the two regional trade communities of INFORMAL VS. FORMAL ECOWAS and CEMAC. Despite political tensions between Nigeria and TRADE … Cameroon in the past, there is significant potential to trade between the Estimates show a staggering two economic blocks. Although official trade statistics indicate that existing discrepancy between official flows are small, we find that trade flows are under-reported by up to a and observed trade, with factor of 50, and that actual trade flows are a multiple of what official data suggest. Similar underreporting might also take place along other land observed trade measuring 40 borders in the region. This note outlines the critical barriers that constrain times official estimates. trade between Nigeria and Cameroon, describes the practical norms that have emerged as a response to those constraints, and recommends key CONTROL POINT AND reforms for the governments to undertake. BORDER PAYMENTS… Informal payments at Overview of existing and potential trade control points and at the border can account for more It is often difficult to get an accurate picture of the magnitude of informal than 50 percent of the total cross-border trade in most developing countries. Many factors contribute to this difficulty, but chief among them are weak state institutions, transfer costs along the widespread practices by traders to underreport trade in order to avoid Enugu (Nigeria)-Bamenda high taxes, and porous borders that are hard to monitor and permit trade (Cameroon) corridor. to cross borders unrecorded. As a result, official trade statistics are unreliable and give a highly inaccurate picture of actual trade flows. In the case of Cameroon and Nigeria, officially recorded non-oil bilateral trade flows represent only a minor fraction of both countries‟ overall trade. In 2010 and 2011, recorded official trade data show that non-oil trade WORLD BANK flows from Nigeria to Cameroon were between 1 USD and 10 million USD, while Cameroon exported an estimated 10 to 30 million USD to Nigeria. To put this in context, the recorded trade data represent only 1 | www.worldbank.org/afr/trade about 1.5 percent of Cameroonian and 0.4 percent offers considerable opportunities; while for Nigeria of Nigerian overall non-oil exports. there is also significant scope to expand exports to Cameroonof a number of locally produced However, by using a combination of techniques to manufactured goods. Using a gravity model, a well- quantify actual cross-border trade, a recent report known tool for analysing the magnitude of trade estimates that Nigeria‟s annual non-oil exports to flows between countries, we estimate that the Cameroon areover 213,000 metric tons in volume, registered value of Nigeria‟s non-oil exports to and 769 million USD in value.1 Overall, this Cameroon in 2009 was less than 8 percent of their indicates a staggering discrepancy between official potential, while Cameroon‟s exports to Nigeria trade data and observed trade, with observed trade were less than 2 percent of their potential level. measuring more than forty times official estimates. The ratio between potential trade to estimated It is important to note that some of these exports actual trade, that is taking account of unrecorded are goods that Nigeria imports from other countries trade, would be smaller. Nevertheless, there is still a and then re-exports to Cameroon, a practice that is considerable gap which suggests the existence of common across West Africa. However, our significant trade costs related to border-related estimates show that even when re-exports are issues, transport, and behind-the border barriers. excluded, the value of Nigerian-made goods exports, largely cosmetics and household plastics, Trade transactions are non-transparent and are 176 million USD—an estimate that is still more unpredictable than twenty times the figures that Cameroonian import statistics report. In analysing actual trade transactions and the roles of different stakeholders in the bilateral trading Cameroon‟s non-oil exports to Nigeria are similarly relationships, we find that trade procedures are inaccurate. We find that Cameroon exports about extremely non-transparent and involve multiple 160,000 metric tons of goods annually, with a value formal and informal payments. It is also apparent of 226 million USD. Products originating in that actual trade relationships and trade barriers are Cameroon, mostly paddy rice in the North, soap, complex and vary according to a number of and fruits and vegetables, account for 62 million characteristics, which makes it nearly impossible to USD of these exports. Assuming that official describe a “typical� trade relationship. For instance, statistics exclude re-exports, our estimates put border procedures and the various barriers traders Cameroonian exports to be about forty times larger encounter may differ between locations than official Nigerian estimates for imports from (geographical characteristics of the border area), Cameroon. weather (seasonal variation), time of day, specific border crossing, scale of operation, type of product, Our analysis indicates that existing economic and and the personalities involved. How a specific trade trade policies in both countries, and their transactions takes place is ultimately determined on application, may be preventing the emergence of a case-by-case basis through extensive negotiations, significant additional bilateral trade between the two which reduces transparency, complicates forward- countries. For Cameroonian producers, Nigeria‟s planning, and increases costs for new entrants into large economy with over 158 million consumers the business. 1 Trade policies remain restrictive with both Three estimation methods were used: quantification of stocks at major markets, collection of trade data from countries applying MFN duties on their respective customs agents stationed at border crossing points, and imports. As a result, Nigerian goods imported into estimation of the number and size of trucks crossing Cameroon face average statutory duties of 19.1 border points by using information collected from private traders and their agents. percent (plus VAT of 17.5 percent and other 2| www.worldbank.org/afr/trade taxes)—broadly in line with CEMAC‟s common number of additional factors. Customs offices aim external tariff (CET). Imports into Nigeria face on to meet revenue targets set at regional headquarters average statutory duties of 11.9 percent based on (or slightly exceed them to demonstrate strong the yet-to-be finalized ECOWAS CET, plus a VAT performance and possibly receive bonuses), but of five percent, and there are official import bans also collect significant informal payments for for a number of products of export interest to themselves. Private sector operators, however, Cameroon. usually have a choice between different routes (and consequently customs posts), or can move into These trade policies and other regulations such as more informal trade by breaking down cargo into product standards are applied, but not necessarily smaller consignments and smuggling them by enforced, by a multiplicity of state agencies that are motorcycle or donkey. present at borders and at various control points along the corridors in the hinterland. On the Because a limited number of traders (or their Nigerian side, these include the Standards agents) cross the border repeatedly, the relationship Organization of Nigeria (SON), the National between them, customs, and other agencies can be Agency for Food and Drug Administration and described as a repetitive game resulting in a mixture Control (NAFDAC), the Nigeria Agricultural of formal and informal border procedures. The Quarantine Service (NAQS), various security threat of diverting goods flows to alternative agencies, drug control units, local government customs posts or outside the formal framework officials, and immigration officials on the Nigerian creates a countervailing power to the authority of side. The situation is similar on the Cameroon side, customs and results in customs aiming to limit the where forest products control units from the burden on traders. As a result, traders are partners Ministry of Forests and Fauna (MINFOF), phyto- rather than „victims‟ in this relationship, and seem sanitary inspection under the Department of to have a strong position in the negotiations Regulation and Quality Control of Agricultural determining payments. On the other hand, the lack Products and Inputs at the Ministry of Agriculture, of transparency in formal procedures and the threat immigration officials, municipal authorities along that agencies may fully apply these policies at any the corridor, various police units and other agencies given time creates significant uncertainty (and costs) are involved alongside federal and state level to traders. customs officials. The result is a well-structured negotiation scheme In principle, state agencies are present at borders to that takes place between the customs officials and fulfil legitimate public policy objectives and to the traders or their representatives. The traders enforce existing rules, but in practice, official trade appeal to the customs officers on the basis of their policies are not applied at most border crossing limited margins and the poverty that prevails in the points. Instead, practical procedures that are only region. Customs officials claim to be mindful of partially based on existing state rules and these conditions and have an interest in keeping regulations are applied. These procedures are the trade flowing through “their� customs posts to keep result of a long process of repeated negotiations revenue up. One effect of this tacit agreement, between traders and government officials, both of however, is that public policy objectives, such as whom find it necessary to devise norms that are food safety, are not achieved as agencies focus on outside the written rules and regulations. collecting (informal) payments from traders instead of effectively enforcing policies. Exactly how these practical norms are implemented is influenced by the power balance between the different actors, their alternative options, and a 3 | www.worldbank.org/afr/trade Finding officially recognized informal mechanisms that work In the South West and North West regions of Cameroon, formal and informal payments are even To respond to this reality, and to influence the arranged in advance for all trucks that will be using outcome of these tacit arrangements, the the main corridor. Rates at the border and at Cameroonian regional customs bureaus in the control points along the corridor are usually fixed (Extreme) North and western part of the country for a whole season, but if customs officials and the have formally issued guidelines for assessing police/gendarmes intend to change the rates—for minimum duties collected per vehicle (ranging example because revenue targets for specific border from small personal vehicles to 22-ton trucks) crossings are adjusted by customs headquarters— which are applied at land borders only, making this they inform the traders about their intention to trade competitive compared to imports through increase the rates. This leads to a new round of major ports. The set of minimum values functions negotiations until a new rate is acceptable to all as guidance for the total value of formal and parties. These negotiations are usually openly informal payments made at land borders that are discussed in public media. generally negotiated between officials and traders, often far in advance. Once customs officers and The trading environment leads to high functional traders agree on the total payment amount, customs specializations declarations are filled in “backwards,� calculating the value of products that correspond to the final Most of the traders engaged in cross-border trade payment. As a result, customs declarations seem to between Nigeria and Cameroon are small traders be fully consistent and all payments are made, but and it is often impractical for an individual trader to we estimate that the value of merchandise is under- transport goods alone. Typically, 40-ton trucks that reported by a factor of up to 50. operate along the major corridors consolidate shipments of up to 100 traders. As a response to Regional customs offices are aware that these values the numerous road blocks and multiple function as target values, as they recently reduced government agencies at the border, a very the minimum values with the objective to “boost� pronounced functional specialization of groups trade with Nigeria. Generally, traders pay more facilitating trade has emerged. These groups than the prescribed minimum values per truck, but include “loaders�, “escorts�, “crossers� and other significantly less than the statutory CEMAC duty individuals who are able to offer specialized rates. Based on interviews and actual customs services. declaration forms, we estimate that traders probably make formal and informal payments of not more Loaders or freight forwarders are usually male and than 10 to 20 percent of statutory CEMAC duty are responsible for ensuring that goods are rates to various customs agencies. Traders pay less transported from their point of collection to the in formal fees than stipulated by regional customs final market. They have extensive knowledge of the guidelines; however, the sum of all informal complex process that takes place in transporting payments is significantly more than the formal goods across the border. They hire the trucks customs fees.2 needed to transport the goods, and negotiate payments at control points, often supported by 2 For example, a newly arrived customs director at a border post was openly criticized by his colleagues for additional reasons for the diversion of traffic, the insisting on collecting statutory import duties. Revenues anecdotal evidence demonstrates that traffic will move to at that border post have fallen by more than 50 percent other border crossings when rates levied by customs are while revenues at neighboring customs posts have perceived as too high. increased correspondingly. While there might be 4| www.worldbank.org/afr/trade “escorts� they hire to accompany goods from the In addition, transport prices per ton/km along point where they are first loaded to the border or major corridors are significantly higher than in from the border to the point of delivery. They often other regions. One key reason is that regulations travel with the trucks, although sometimes escorts seem to effectively prevent trucks from cross- drive in separate vehicles ahead of the trucks in border delivery of goods, even though de-jure order to make the necessary payments to road restrictions do apparently not exist. Goods are controls in advance of the arrival of the goods. In generally offloaded at the border and reloaded onto either case, the escort is responsible for negotiating trucks of the importing country. As a result, the way payments at various road control points along the current regulations are applied seems to prevent the route. Escorts are more common in the southern emergence of integrated transport service providers, part of the Cameroon-Nigeria border. In the north, increasing logistical costs, particularly for perishable it appears that loaders incorporate the functions of goods. the escort into their own operations. Another important reason for high transport costs The crosser, or customs broker, serves as a clearing are the road conditions, especially in border areas, agent, with the primary responsibility of dealing because they increase real costs and generate with the import/export procedures involved in opportunities for rent extraction. Even during the moving goods from one side of the border to the dry season when road conditions are relatively other. Crossers tend to live close to the border good, traffic on roads leading to the borders, areas, where they have longstanding work usually dirt roads, is very slow, trucks relationships with the various government officials breakdownsare frequent, and comparatively high present at the border posts. truck maintenance costs are the norm. In the rainy season, many of these roads become impassable, These specialized service providers are able to cut and physically crossing the border can become costs by negotiating formal and informal payments extremely cumbersome, particularly impacting in advance, thereby partially offsetting the high costs trade in perishable goods. While most roads generated by the lack of transparency. Access to the remain in poor condition, the main corridor from networks of specialized service providers allows Bamenda to Enugu is being rehabilitated traders to overcome some of the barriers they face, (completion is expected by 2014) and transport such as limited access to information, enforcement costs that operators will incur are expected to fall by of contracts, and harassment by officials. These up to seventy percent. However, it will be important networks are strongly influenced by ethnic networks to review transport regulations to ensure there is that play an important role in trade, and access to increased competition along the corridor and lower these appears to be somewhat restricted as new transport costs which will be passed on to users of traders need to be introduced into the networks by transport services. insiders. It is the lack of transparency that increases overall trading costs. Specialized service providers Transport costs are also high because of the large can reduce these costs, and collect rents in that number of control points/roadblocks along major process. At the same time, the lack of transparency corridors, where additional informal payments in procedures effectively prevents easy entry of new need to be made. Agencies justify their presence at traders operating along these routes. control points to allegedly ensure security and prevent illegal movement of unauthorized goods or Regulations and poor infrastructure keep transport persons. They claim that these control points are prices high necessary for ascertaining that traders have paid proper duties at the border, and for intercepting goods that may have escaped formal border 5 | www.worldbank.org/afr/trade crossings. However, these control points often fail percent of the total transfer costs along the Enugu to achieve the intended public policy objectives, (Nigeria)-Bamenda (Cameroon) corridor. A recent since traders can just pay more in informal fees to study finds that bribes as a share of total variable be able to move their products on. costs are between zero and two percent in Southern and Eastern Africa, 6 percent in WestAfrica, but 13 The frequency of control points along the to 27 percent in Central Africa.4 Additional work in corridors, as well as the payments necessary at each East Africa shows that even after adding local point differ widely. Trucks with foreign number council taxes, which often are legal within certain plates (in the few cases that they enter) are subject limits, informal charges comprise only about 9.7 to particularly high payments at roadblocks. Table percent of total transfer costs in Kenya, 3.5 percent 1 shows the number of control points along major in Tanzania, and 4.2 percent in Uganda.5 corridors, and presents average payments that standard trucks incur on these corridors. In the Conclusions and recommendations northern section of the border, we find that there are control points, on average, every 11 kilometers, Removing barriers to trade between the two while along the Enugu to Bamenda corridor traders economic blocs in West and Central Africa is of face a roadblock every 15 kilometers. However, the strategic importance for closer economic road blocks are not evenly distributed along the integration among countries in West and Central corridors and the frequency of control points Africa, and to generate an Africa-wide free trade increases significantly closer to the border, where area by 2017, an objective endorsed by African control points can be found every five kilometers or governments. Integrating the different economic less. Average payments per stop also vary groupings through improved infrastructure, better significantly between corridors, from 40 USD along market access, greater transparency, and simplified the Maga-Limani corridor to 169 USD along the border procedures could also speed up domestic Garoua-Demsa corridor (see table 1). reforms and those initiatives aimed at removing internal barriers within ECOWAS and CEMAC, Table 1: Frequency of Road Controls and where progress has been slow. Associated Costs3 Removing barriers to trade between the two blocks Distnace Number of Average Cost per Size of Corridor (km) Control Points Truck (USD) Truck (MT) will particularly benefit those people living in Ekok - Mamfe - Bamenda Abonshie - Kombo - Bamenda 250 220 12 11 633 581 20 20 border areas. The border areas in both Cameroon Maga - Limani 150 13 521 40 and Nigeria are relatively remote and far from Boukoula - Guider 80 7 290 40 Demsa - Garoua 45 4 676 40 economic centres in their respective countries. Onitsha - Mfum 320 25 461 20 Generating linkages between these relatively isolated areas can increase consumer choices and Overall, the informal charges in the border region allow producers to benefit from larger markets, between Cameroon and Nigeria are significantly better access to the intermediate inputs they need, higher than comparable charges in East Africa, and and allow them exploit economies of scale. This even higher than along other corridors in Central could generate substantial income and employment Africa. Informal payments at control points and opportunities for the people in border areas, but those at the border can account for more than 50 4 See Teravaninthorn and Raballand, 2009, “Transport 3 The data in Table 1: Frequency of Road Controls and Prices and Costs in Africa: A Review of the International Associated Costs was collected in the context of the Corridors�, World Bank, Washington, D.C. 5 underlying study during trips and interviews with truckers World Bank, 2009, “East Africa: A Study of the in Cameroon between November 2011 and March Regional Maize Market and Marketing Costs�, AFTAR 2012. Report 49831, Washington, D.C. 6| www.worldbank.org/afr/trade also beyond. It could also contribute to bringing key precondition for the joint border post at down costs of key products such as food staples that Ekok/Mfum that is being constructed under the are traded across borders, and help ensure a more oversight of ECOWAS and CEMAC commissions reliable and affordable supply of foods and other in the context of the corridor rehabilitation project essentials, especially for the most vulnerable to reduce delays and trade costs. members of the population. Ongoing infrastructure investments are expected to Significant policy reforms are needed for reduce the transport costs that operators incur, but Cameroon and Nigeria, and by extension the these infrastructure investments need to be ECOWAS and CEMAC regions, to realize their complemented with reforms aimed at removing vast trade potential. However, it will be critical to informal payments and other regulatory constraints. ensure that policy reforms are undertaken in such a This will be important to maximize the economic way that overall trade costs do not increase as a impact of these investments. result of these reforms. For instance, if statutory policies were to be applied fully, cross-border trade A significant share of costs is incurred at control would likely fall significantly. Payments for imports points along key transport corridors, and our into Cameroon would increase at least five- to ten- analysis shows that a complete removal of all fold, likely bringing cross-border trade to a halt, informal payments is likely to yield a reduction in while effectively applying import bans in Nigeria overall trade costs comparable to those resulting would prevent key products, such as rice, from from ongoing infrastructure upgrading. Addressing crossing into Nigeria. the issue of informal payments, if politically feasible, therefore presents an opportunity for In order to facilitate bilateral trade and avoid policy quick improvements and should be addressed as a changes that would negatively affect trade, it will priority. As part of the financing arrangement for therefore be important to focus on formalizing the the rehabilitation of the Enugu-Bamenda corridor, practical norms and procedures that already exist, both governments have already committed to while removing informal payments at borders and reducing the number of roadblocks from about control points behind the border. In addition, it will thirty to two, but a comprehensive plan to address also be important to remove existing import bans in this issue is still needed. An important step will be Nigeria. to review the political economy behind the persistent presence of these road blocks. Such an At the same time, both countries should review and initiative will have to be complemented by the rationalize existing border procedures and allow for establishment of a monitoring system and an delegation of responsibilities to reduce the number impartial and powerful grievance mechanism to of agencies present at the border. This would ensure that road blocks do not re-appear once the reduce the number of officials interacting with attention of policy makers shifts to other issues. traders for every individual transaction, bringing down costs and delays, while strengthening the Additional regulatory reforms aimed at increasing application of those regulations and requirements competition in cross-border logistics services will that aim at fulfilling legitimate policy objectives. also be essential to ensure lower operating costs are Governments should also aim to publish and make passed on to users. It will therefore be important to easily accessible all procedures, payments, and better understand how the application of current regulations in order to increase transparency at regulations prevents the emergence of integrated borders and reduce opportunities for border logistics service providers and to explore how they agencies to extract rents. Such review and can be revised to increase competition and reduce rationalization of agencies and procedures will be a transport prices. 7 | www.worldbank.org/afr/trade currently benefitting from the current uncertain Such a comprehensive policy reform can reduce trading environment, but prudent implementation overall costs to traders, while increasing official of such reforms has the potential to significantly receipts for state coffers and reducing the amount boost trade while also contributing to an overall of rents that state agents at borders and road blocks improvement in governance in both countries. collect informally. It is likely that such measures will encounter significant resistance from those 8| www.worldbank.org/afr/trade About the Authors This note is based on a forthcoming World Bank report presenting a detailed analysis of how cross-border trade between Nigeria and Cameroon operates on the ground. Mukhtar Amin is Economist at Associates for International Resources and Development based in Boston and Mombert Hoppe is a Trade Economist in the Africa Region at the World Bank. This note was edited by Paul Brenton (World Bank) and Catherine Sear (World Bank). 9| www.worldbank.org/afr/trade