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 : marketing@mpc.gov.my 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