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Debate over transit fees

Published: Sunday, Nov 14, 2010

Debate over transit fees

Sunday, November 14, 2010

Sadiq Ahmed

2010-11-14__bus01Landlocked countries have a huge geographical disadvantage in transport costs and many such countries are amongst
the poorest developing countries. To offset this natural disadvantage, a number of international conventions have been formulated that seek to ensure freedom of transit for these countries.

These include: Convention and Statute on Freedom of Transit, Barcelona, 1921; Convention on the High Seas, Geneva, 1958; United Nations Convention on the Law of the Sea, Montego Bay 1982; Convention on Transit Trade of Land-Locked States, New York, 1965; and World Trade Organisation, The General Agreement on Tariffs and Trade (GATT).

These UN conventions all provide for freedom of transit. The WTO agreement, in particular, lays down clear rules and obligations for member countries in the matter of transit access, including what are considered as proper levies and charges in relation to transit.

Despite this well-defined international convention, there is debate and confusion in Bangladesh on transit fees and the implementation of the trade and transit agreements reached by Bangladesh and India in January 2010. These agreements were laid out in the joint communiqué issued in New Delhi on January 12, when Prime Minister Sheikh Hasina visited India.

The communiqué broadened the transit trade routing options for India's land-locked northeast states to the rest of India and abroad from river routes only to include road, rail and ports of Bangladesh. It also offered similar opportunities to Bhutan and Nepal. This policy change is undoubtedly a bold step in the right direction and will have far reaching positive implications for Bangladesh as well as other northeastern countries of South Asia (India, Bhutan and Nepal). The main challenge is implementation.

I have written quite a bit on gains for Bangladesh from this move in previous articles and in this note, I will focus on the transit fee issue that seems to have become a sticky point, at least in public and political debates.

Article V of the WTO GATT lays down the following agreed principles governing transit trade.

1) There shall be freedom of transit through the territory of each contracting party via the routes most convenient for international transit, for traffic in transit to or from the territory of other contracting parties. No distinction shall be made which is based on the flag of vessels, the place of origin, departure, entry, exit or destination, or any circumstances relating to the ownership of goods, of vessels or any other means of transport.

2) Any contracting party may require that traffic in transit through its territory be entered at the proper custom house, but, except in cases of failure to comply with applicable customs laws and regulations, such traffic coming from or going to the territory of other contracting parties shall not be subject to any unnecessary delays or restrictions and shall be exempt from customs duties and from all transit duties or other charges imposed in respect of transit, except charges for transportation or those commensurate with administrative expenses entailed by transit or with the cost of services rendered.

3) All charges and regulations imposed by contracting parties on traffic in transit to or from the territories of other contracting parties shall be reasonable having regard to the conditions of traffic.

4) With respect to all charges, regulations and formalities in connection with transit, each contracting party shall accord to traffic in transit to or from the territory of any other contracting party treatment no less favorable than the treatment accorded to traffic in transit to or from any third country.

There are some other provisions of Article V but I have focused on the ones most relevant to the discussion here. The main point is that transit trade cannot be subject to any customs duties or fees/charges that are purely transit related. The economic rationale for these is fairly straightforward.

First, custom duties are levied in the country of destination where the goods are actually used.

And second, a pure transit fee is like a rent on geography. It is tempting to argue that a transit fee should be charged as a percentage of cost saving for the landlocked country owing to the transit access. If Bangladesh starts charging fee based on its geographical location, the same can be done by Nepal or China, which are located upstream from where the Ganges and the Brahmaputra flow, who might then threaten to stop all water flows downstream without payment of rent by downstream countries. It is proper that international conventions define rights and obligations in matters of sharing common resources such as water, air and land and sea routes with a view to minimising the disadvantages conveyed by geography.

However, the UN convention rightly recognises that there are genuine costs of providing transit access by the host country that must be recognised and compensated by the guest country.

These costs are identified above to include: transportation services (if used), administrative expenses and charges for use of services. Of these three categories, the third is most significant. Even if guest countries use their own transport facility, transit may involve the use of port services, road services, or rail network services.

These are economic services that require real resources in terms of investment in fixed assets as well as financing of operations and maintenance by a host country and as such, a guest country is justifiably obliged to pay user fee for these services.

There are well-known principles for determining user charges of transport networks. From economic theory, the notion of social marginal cost is a well-accepted principle for determining the user charges.

The term 'social', as opposed to 'private', is advocated in order to internalise the external costs (such as congestion, environmental pollution; added incidence of accidents from extra traffic) along with the financial cost of network provision and maintenance. These costs will need to be properly identified and estimated, and also regularly updated. The institution of transport network service charges as transit fees will have the additional benefit of levying similar charges for domestic users and thereby commercialising the transport industry. The benefit for resource mobilisation can be substantial.

The writer is the vice-chairman of Policy Research Institute of Bangladesh.