FOREIGN PROCUREMENT

1 Class lecture
Dilnesahu S.
CONTENTS

Introduction

Global Business Environment

Sourcing global supplier

Incoterms and payment methods

2
CHAPTER ONE

Globalization

Definitions of basic terms:

Sourcing models and theories

Reasons for global procurement

3
CHAPTER OBJECTIVES
 To enable understanding on:
 Globalization

 Basic terms such as sourcing, outsourcing, global

sourcing, offshoring, procurement, purchasing
 Rationale for global procurement

4
CHAPTER ONE: INTRODUCTION
Globalization
 "Globalization is not something we can hold off or turn
off . . . it is the economic equivalent of a force of nature -
- like wind or water.“ Bill Clinton (American 42nd US
president (1993-2001))

5
EARLY HISTORY
 60000 years ago
Archaic: Asia then Great Divergence

Early modern: 1600 to 1800 European empires: porto-globalization: expansionism

slave trade, resources of western hemisphere, 3o years war

Modern:

 peace following napoleon war

 19th c industrial revolution 1815-70

 1850- transportation revolution car, railway

 1956-shipping containers
6
 1970’s aviation industry

 After world war II: global organizations, UN, WTO, IMF….

 MEANINGS OF GLOBALIZATION
 In simple terms, Globalization means the speedup of movements and exchanges (of human beings,
goods, and services, capital, technologies or cultural practices) all over the planet. One of the effects of
globalization is that it promotes and increases interactions between different regions and populations
around the globe.

 According to WHO, globalization can be defined as ” the increased interconnectedness and

interdependence of peoples and countries. It is generally understood to include two inter-related
elements: the opening of international borders to increasingly fast flows of goods, services, finance,
people and ideas; and the changes in institutions and policies at national and international levels that
facilitate or promote such flows.”

 From economic perspective, Committee for Development Policy defines globalization as:
“the increasing interdependence of world economies as a result of the growing scale of cross-border
trade of commodities and services, the flow of international capital and the wide and rapid spread of
technologies. It reflects the continuing expansion and mutual integration of market frontiers (…) and the
rapid growing significance of information in all types of productive activities and marketization are the
two major driving forces for economic globalization.”

 In geography, globalization is defined as the set of processes (economic, social, cultural, technological,
7
and institutional) that contribute to the relationship between societies and individuals around the
world. It is a progressive process by which exchanges and flows between different parts of the world are
intensified.
MEANINGS OF GLOBALIZATION
The above definitions show globalization is represented by the following key
words:

 Movement and exchanges (people, goods/services, capital, technologies,

cultural practices)
 Interconnectedness and interdependency (through open border and
institutional change)
 Growing cross border trade, capital flow, technology
 Intensified exchanges and flows among societies

8
DRIVERS OF GLOBALIZATION

1) Technological drivers

2) Political drivers: The institution of GATT (General

Agreement on Tariffs and Trade) 1947 and the WTO
(World Trade Organization) 1995

3) Market drivers

4) Cost drivers

5) Competitive drivers

9
TYPES OF GLOBALIZATION
 Economic globalization: is the development of trade systems within transnational actors such as
corporations or NGOs;

 Financial globalization: global financial integration participation of IMF etc

 Cultural globalization: refers to the interpenetration of cultures which, as a consequence, means nations
adopt principles, beliefs, and costumes of other nations, losing their unique culture to a unique, globalized
supra-culture;

 Political globalization: the development and growing influence of international organizations such as
the UN means governmental action takes place at an international level.

 Sociological globalization: information moves almost in real-time, together with the interconnection
and interdependence of events and their consequences. People move all the time too, mixing and
integrating different societies;

 Technological globalization: the phenomenon by which millions of people are interconnected thanks to
the power of the digital world via platforms such as Facebook, Instagram, Skype or Youtube.

 Geographic globalization: is the new organization and hierarchy of different regions of the world that is
constantly changing. Moreover, with transportation and flying made so easy and affordable, apart from a
few countries with demanding visas, it is possible to travel the world without barely any restrictions;

 Ecological globalization: accounts for the idea of considering planet Earth as a single global entity – a
common good all societies should protect since the weather affects everyone and we are all protected by the
same atmosphere.
10
BENETIFTS AND CHALLENGES OF
GLOBALIZATION

Benefits Negatives:
 Global goods exchange  Acculturation
 Distance barrier  Economic imbalance:
 Economic boom (1970 82% of world wealth is
free trade, 33 fold to 1%
export  Environmental
 Financial problems:
globalization: deforestation,
3D:disintermediation, pollution
decomissioning, &
deregulation
 Cultural globalization
11
DEFINITION OF TERMS
Outsourcing
 At its most basic, outsourcing is about moving internal
operations to a third-party. This can come in the form of
selling physical plant to a supplier, to buy back goods or
services, or shifting an entire business division to a third-
party and again buying the service back. The basic
philosophy being: To move transactional activities to the
experts in order to give an organization the capacity to
focus on its expertise.
Cost saving, lose capability, job lose

12
DEFINITION OF TERMS
Offshoring
 offshoring is primarily a geographic activity. In the West,
goods are expensive because the staff required to
produce and distribute them are costly. In the developing
world, by contrast, vast inexpensive labour pools provide
an easy bedrock for a low-cost economy.
 Cost advantage, advantage to least developed,
exploitation

13
DEFINITION OF TERMS
Offshore outsourcing
 The ultimate means to save a significant amount of money
is to combine offshoring with outsourcing. That is move
production to a third-party that is based in an overseas
location.

 Offshoring is the act of delegating part of business

work to an external and/or internal entity that is
located somewhere else.
 Outsourcing involves obtaining certain
services/products from a third party, while
offshoring companies relocate some of their
services/product lines to regions that offer them a
competitive advantage. Due to the unifying factor of
competitiveness, offshoring and outsourcing can be
entangled, leaving a very thin line to separate
them—especially in the service sector. 14
OUTSOURCING TREND

15
SOURCING, PROCUREMENT, PURCHASING

16
SOURICING MODELS

17
REASONS FOR GLOBAL PROCUREMENT

18
REASONS FOR GLOBAL PROCUREMENT
Porter’s pull and push factors
Pull factors:- external competitive
pressure
 Negative, Short term
 Cost saving
 Normal trading relation
Push factors: from internal
strategy
 Positive, long term competitive
advantage
 Strategic sourcing relation
(Stevens, 1995) domestic problems:
 supply in availability, quality, price,
technology problems
19
 REASONS FOR GLOBAL PROCUREMENT
Comparative vs Absolute Advantage
Absolute advantage : a country has an
absolute advantage in the production of a
product when it is more efficient than any
other country in producing it.
Example :French wine and England textile

• In Smith’s time, this suggested that the English should specialize

in the production of textiles while the French should specialize in
the production of wine.

20
 REASONS FOR GLOBAL PROCUREMENT
Comparative vs Absolute Advantage
• David Ricardo’s question in 1817’s book Principles of
Political Economy to Adam Smith’s theory: What might
happen when one country has an absolute advantage in the
production of all goods? No need for international trade?
• Comparative advantage is the assertion that it makes
sense for a country to specialize in the production of those
goods that it produces most efficiently and to buy the goods
that it produces less efficiently from other countries, even if
this means buying goods from other countries that it could
produce more efficiently itself.

• Example: A produce 10 or 20 of X and Y and B produce 2 or

10 of X and Y, respectively with the same total resource.
Find absolute and comparative advantage of A.

21
 Overview…ct’d
Comparative advantage versus Absolute Advantage
Countries Unit of measure Resource consumption to one ton: Total resource
available
Cocoa Rice
Ghana $ $10 $20 $200
Korea $ $40 $10 $200
Ghana Production
Ghana maximum Cocoa ton 20 0 $200
Ghana maximum Rice ton 0 10 $200
Ghana mixed production ton 10 5 $200
(no trade)
Korea Production
Korea maximum Cocoa ton 5 0 $200
Korea maximum Rice ton 0 20 $200
Korea mixed production ton 2.5 10 $200
(no trade)
Total for specialization 20 20
maximum /trade
22
Total for no trade mixed 12.5 15
CHAPTER TWO: GLOBAL BUSINESS
ENVIRONMENT AND IMPLICATIONS ON FOREIGN
PROCUREMENT

PESTEL Analysis

Elements of global procurement

Potential problems and risk

management in foreign procurement
23
CHAPTER OBJECTIVES
To enable understanding on:
 Global environment’s impact on foreign
procurement
 PESTEL Analysis

 Elements in global procurement

 Problems and risk management in foreign

procurement

24
PESTEL ANALYSIS
 PESTELI Analysis is a useful tool for understanding the
“big picture” of the environment, in which we are
operating, and the opportunities and threats that lie
within it. By understanding your external environment, it
helps to take advantage of the opportunities and
minimise the threats
 ‘ETPS’ „scanning the business environment‟ by Francis
J. Aguilar - Economic, Technical, Political, and Social.
 PEST: Political, Economic, Social, Technological
 PESTELI : Ecological factors, Legislative requirements,
and Industry analysis (Aguilar, 1967). 25
PESTEL

Political Economic

*Threats
*Opportunities
Social Technological

Environmental Legal

Industry
26
PESTEL PROS AND CONS
 Pros:  Cons:
 Simple framework  Over simplification by scant data

 understanding of the wider business  Needs regular use for effectiveness

environment
 Requires different people
 Encourages the development of
external and strategic thinking  Time consuming and costly data

 To anticipate future business threats  Fast changes making anticipation

difficult
 To spot business opportunities and
exploit them fully  Too much data leading to „paralysis
by analysis‟
 Promote change
 The data used requires unproven
 Avoids risky decisions leading to assumptions
failure out of your control
27
 PESTEL TEMPLATE1: ANALYSIS
Subject for PEST(ELI) analysis:
Political Economic
 Stage of business cycle
 Government type and stability  Current and project economic growth, inflation and
 Freedom of press, rule of law and levels of bureaucracy and interest rates
corruption  Unemployment and labour supply
 Regulation and de-regulation trends  Labour costs
 Social and employment legislation  Levels of disposable income and income distribution
 Tax policy, and trade and tariff controls  Impact of globalisation
 Environmental and consumer-protection legislation  Likely impact of technological or other change on
 Likely changes in the political environment the economy
 Likely changes in the economic environment
Socio-cultural Technological
 Population growth rate and age profile
 Population health, education and social mobility, and
attitudes to these  Impact of emerging technologies
 Population employment patterns, job market freedom and  Impact of Internet, reduction in communications
attitudes costs and
to work increased remote working
 Press attitudes, public opinion, social attitudes and social  Research and Development activity
taboos  Impact of technology transfer
 Lifestyle choices and attitudes to these
 Socio-Cultural changes

Ecological factors – Air quality, transportation, parking, pollution discharge, water quality, waste management, land
use, coastal resources etc.
Legislative requirements – Primary and secondary legislation in relation to specific Bills e.g. employment laws,
contracts over rights of staff, rights of patients, direct payments etc. 28
Industry analysis – Demand, liaison and selection for services, products and/or component parts on the basis of price,
quality, delivery times and services support; market knowledge, forecasting, purchasing strategies, liaising with users,
business efficiency;
 PESTEL TEMPLATE 2:IMPACT
PEST(ELI) Analysis Grid

Subject Area:

Date:
PEST (ELI)
Potential Impact Implication and Importance
Analysis Factors

Relative
H- High Time Frame: Impact:
Type: Importance:
M- medium 0- 6 month Increasing >
Consider changes to treatment and Positive + Critical
public attitudes as well as government L – Low 6-12 months Unchanged =
Negative – Important
changes
U- 12-24 months Decreasing <
Unknown Un-important
Undetermined 24+ months Unknown
Unknown

Political
Economic
Socio-cultural
Technical 29
Ecological etc.…
UNDERSTANDING DIFFERENCES IN GLOBAL
ENVIRONMENT
 Political:
 collectivism vs individualism
 democratic vs totalitarian

Anarchism Pluralist Totalitarianism

Direct democracy Representative democracy Autocratic/ Totalitarian

Analysis questions:
 How stable is the government?
 Is it a democracy or a dictatorship? Planned economy or capitalist?
 If a new party comes into power, will the rules of business change dramatically?
 Is power concentrated in the hands of a few, or is it clearly outlined in a constitution or similar national
legal document?
 How involved is the government in the private sector?
 Is there a well-established legal environment both to enforce policies and rules as well as to challenge
them?
 How transparent is the government‟s political, legal, and economic decision-making process? 30
Risks: cancelation, confiscation, government control, or heavy intervention
EXAMPLES OF RISKS
 India’s cancellation of $3 Billion US drone
 for delay and cost transparency issues from US Gov’t

 Corruption levels

31
ECONOMIC

32
CULTURAL/SOCIAL

33
UNIVERSAL GESTURES

34
CONTROVERSIAL GESTURES

35
CULTURAL/SOCIAL
 Population
 Life style: family, mobility, recreation, work

 Attitude: work ethic, success

 Living condition: poor or advanced

 Division of work: men women role

 Value system: hedonistic, altruistic, moralistic

36
LEGAL
 single window
 Integrated custom boarder management

 Free trade zone

 Tariff and tax

 single administrative document

 Demurrage charge

ENVIRONMENTAL

37
ENVIRONMENTAL
 Sustainability
 Product impact

38
ENVIRONMENTAL

39
RISKS IN INTERNATIONAL PROCUREMENT
 Time differences.
 Language barriers

 Quality expectations

 Compliance issues

 Production scheduling

 Logistics

40
CHAPTER THREE: LOCATING, EVALUATING,
AND SELECTING SUPPLIERS THROUGH
PROCUREMENT METHODS

Procurement methods

International Competitive bidding

procedure

41
3.1. METHODS OF PROCUREMENT
The FDRE procurement Proclamation stated that the
following methods shall be used in public procurement:
(a) Open Bidding
(b) Request for proposals
(c) Two stage Tendering
(d) Restricted Tendering
(e) Request for Quotation
(f) Direct Procurement

42
 3.1. METHODS OF PROCUREMENT
The proclamation underlined three points as to the use of the
aforementioned methods.
 Except otherwise provided in this Proclamation Public Bodies shall use
open bidding as the preferred procedure of procurement.
 Public Bodies may use a method other than open bidding only where
conditions for use of such other method stipulated under the Proclamation
are satisfied.
 Public Bodies shall not split procurement requirements for a given
quantity of goods, works or services with the intention of avoiding the
preferred procurement procedure stated under this Proclamation or in the
procurement directives.

43
 3.2. OPEN BIDDING
 Open bidding is the process through which public announcement-usually
through official newspaper- of bid is made so as to procure goods/services
in a manner that keeps price offers minimum by way of competition.
 Open Bidding :national and international competitive bidding

Conditions for international open bidding

 International Competitive Bidding is applicable
when the domestic suppliers are deemed to be
incapable of performing the contract and the
value of the contract is in excess of Birr
50,000,000, Birr 10,000,000, Birr 2,500,000 and
Birr 7,000,000 for works, goods, consultancy
services and other services respectively. 44
OPEN BIDDING…
Procedures for International Open bidding
If lack of competition unless foreign firms are invited
Open international bidding shall follow the provisions:
 The invitation to bid and the bid documents shall be in the English language;
 The IFB shall be advertised in a news paper published in English language
(circulation, Agency’s website)
 The time allowed for submission of bids shall be sufficient and not be less
than the prescribed.
 Technical specifications shall be compatible with national and international
requirements
 Candidates shall be permitted to express their bids in Ethiopian Birr or in a
currency widely used
 General and special conditions of contract shall be of a kind generally used
in international trade.
 restricted tendering, request for proposals, request for quotation or direct
procurement 45
 3.3. RESTRICTED BIDDING
Conditions
 object available only with limited suppliers;

 The cost of procurement does not exceed the threshold:

 For works 2,000,000.00

 For goods 500,000.00
 For consultancy 300,000.00
 For service 400,000.00
 Where a repeated advertisement of the invitation to bid fails to attract
bidders in consecutive announcement subject to evidence that:
 No condition discourages bidders from participation in IFB,BD
 Bidders are willing to participate in restricted tendering if it is not
hurting the procuring entity.

46
3.3. RESTRICTED BIDDING
Procedures
 Restricted tendering procedures are the same as those
applied in open tendering, except that:
 IFB to bid shall be sent to all such suppliers. The invited
suppliers shall not be known to any other bidder.
 Selection be made from registered suppliers:

 Method shall include as far as possible be at least 5

suppliers and allow competition.
 Opening before closing date after prior notice.

 Suppliers may be waived from Bid security and payment

for bid document from

47
3.4.DIRECT PROCUREMENT
Conditions:
The Public Body may use direct procurement only where :
 Objects can be supplied or provided only by one candidate;
 for additional deliveries by the original supplier : parts replacement , services or
installations or as the extension of existing supplies services, interchangeability;
 additional works not more than 25 % of original
 the repetition of similar works or consultancy awarded on the basis of open or restricted
bidding;
 pressing emergency;
 shopping is the only method;
 For purchase under exceptionally advantageous temporary conditions. For unusual
disposal by firms which are not suppliers.
 the contract price does not exceed 1500 for a single purchase and 30,000 annually.
 Selective purchase shall not exceed the value of 50,000
 This method is not resorted to with a view to avoiding possible competition or promote
discrimination among candidates.
48
3.3.DIRECT PROCUREMENT
procedures
 shall be free to negotiate on price and conditions of
offer with the sole candidate.
 Other than shopping and exceeding the value of
1500 shall be confirmed by a contract signed by
both parties.
 Shall not exceed 25% of the original value or lead
to price change if need be to continue with the
previous supplier

49
3.4. REQUEST FOR PROPOSAL
conditions
 For consultancy services or contracts involving
consultancy covering more than 50% of the amount of
the contract.
Procedures
 not less than three and not more than seven

 A request for proposals shall contain at least the following

information:
The name and address of the procuring entity; Description
of the services required, potential conflicts of interest, the
criteria and manner for evaluating the proposals, Place
and deadline for the submission.
50
3.4. REQUEST FOR PROPOSAL
 RFP with or without BD
 Adequate time
 Negotiation with first ranking on volume and nature is permissible
 Bid document follow open bidding
 Weights 70, 80, 20
 The technical evaluation may take a form of:
Quality and price:
Experience 5-10% Least price
Consultancy methodology 20-50% Qualification of consultants
Transfer of knowledge 5-10% One consultant
Consultants’ qualification 30-60%
Involvement of Ethiopians 5-10%
Quality
Budget limitation

51
3.5. REQUEST FOR QUOTATION
Conditions
 for the purchase of readily available and consumable
goods or for items that could not be procured in bulk or
for procurement of works or services for which there is an
established market, so long as the estimated value of the
contract does not exceed :
For Works 250,000.00
 For Goods 100,000.00
 For consultancy 60,000.00
 For Services 75,000.00

52
3.5. REQUEST FOR QUOTATION
 from at least three, if possible from among suppliers registered
 shall not repeatedly invite same suppliers
 clear statement of the requirements
 adequate time be given
 offer reflect the prevailing competitive market price, refer price
lists of the agency
 Electronic means of communication of invitation and pro-forma
could be used if: know how, secure, postal is allowed
 Separating purchases is prohibited for the sake of applying this
method
 The Performa and the purchase order together serve as a
contract that no separate contract is required

53
3.6. TWO STAGE BIDDING
Conditions
 when it is not feasible for the Public Body to formulate
detailed specifications
 Public Body seeks to enter into a contract for the purpose
of research, experiment, study or development, except :
the production is large enough to establish commercial
viability
 no bids are submitted as a result of the nature of the
object of procurement because of specification
 Technical character makes it necessary for the Public
Body to negotiate with the suppliers.

54
3.6. TWO STAGE BIDDING
Procedures
 Invite (solicit)

 hold discussion

 draw up a specification

 The first bid evaluation may be undertaken without the involvement

of candidates
 invite such candidates to submit proposals on the basis of the
revised specification.
 A supplier may withdraw in the second.

 submitted at the second stage to ascertain the successful bidder.

 The Public Body may engage in negotiation with the first ranking
bidder concerning any aspect of its bid, except price.

55
3.7.SPECIAL PROCUREMENT
Large Value
 There shall be established a central body

 large value procurements having national significance and

procurements of supplies for which a demand is shown by
more than one public body
 The Minister (MOFED) shall identify and update the types of
procurements to be executed on account of their national
significance
 The central unit shall request the agency in writing the need
to make high value
 High value procurement shall be made through open
bidding.
56
3.7. SPECIAL PROCUREMENT
Procedure of Framework Contract
be used to fulfill similar procurement requirements of various
public bodies or recurrent procurement requirements of a
public body.
Procedures to meet similar procurement requirements of public
bodies within a given time frame:
 the Agency shall undertake a survey of the similar
requirements of public bodies, issue a list of goods and
services
 public bodies shall prepare a forecast
 The central body shall conclude and administer framework
contracts
 Public bodies shall conclude the procurement by making
order ( conform to terms of frame work on price, delivery ,
pay and other terms)to suppliers
public bodies shall not be allowed to vary unit prices and such 57
other fundamental terms
SPECIAL PROCUREMENT
Procedure of Framework ..Ctd
 Body and supplier may agree on terms that have not been dealt with in
the framework contract or not materially affect it.
 The framework contract is awarded through open bidding procedure
and may remain valid for three years;
 public bodies shall have to adhere to the criterion of fixing prices of
goods and services to be established in the directive.
 The central body consolidates needs, develop procurement plan,
communicates to the agency and government entities, concludes the
contract, administer the process via open bidding except issuance of
purchase order.
 One month notice to cancel on price or on grounds of failure to perform

 The PPPAA is responsible to update items of frame work purchase and

notify

58
SPECIAL PROCUREMENT
Procedure of Framework ..Ctd
 The procurement entities shall not conclude separate contract unless
it is not materially affect or is not included in the framework contract.
 Any change shall be communicated to the central body. Acceptable
agreements may involve:
 Shortening the timing of delivery and payment, Determining a
single delivery quantity, Changing the place of delivery.
 procuring entity may procure by itself with one of the methods if the
central body fails to conclude

59
SPECIAL PROCUREMENT
Procedure of Framework ..Ctd
Public bodies should consider the following during framework purchase:
 Procure items enlisted under framework procurement using the same
method
 Discharge its framework obligation
 Involve the central body in case of dispute with the supplier
 Determine the timing and size of each delivery
 Report irregularities made by the supplier to the central body
A government entity may also procure through framework purchase on the
following conditions:
 The object of procurement is repetitively procured
 There is no economic or use related benefit in procuring the item/service once
 The government entity should use the budget allotted for the procurement in
different times.

60
3.9. OTHER METHODS OF PROCUREMENT
 Empanelment/preferred system: short listed
suppliers
 Negotiation

 Long term Agreement:

 single or multiple;
 with bid at call-off or without bid

61
3.10. PROCUREMENT PROCEDURE

62
3.10. IMPORT PROCEDURE OF ETHIOPIA
1. Registration
 To secure license, one must be registered by MoTRI
 Already established businesses need to also register certain
products
2. Import license
 Commercial Registration and Business Licensing Proclamation No.
980/2016 applies (Permit, ban, authorized other licenses)
 To get license, one has to fulfil required documentation, and
specific industries minimum requirement:
 Residence ID
 Rent agreement
 Registration
 Industry regulatory requirement
63
 Facility requirement
3.10. IMPORT PROCEDURE OF ETHIOPIA
3.Pre-import permit for restricted goods:
Two step process: pre-import permit, import permit
Product Regulatory
Medicinal, food, cosmetics Food & Drug Auth.
Communication Eqt. INSA
Telecommunication eqt. MoC(Communication)
Vehicle MoTL

4. Arrange payment issues

1) Franco valuta: no approval, no need for payment of
foreign currency, exceptional
2) Banks:
1) Foreign currency approval 64
2) Payment arrangement with importer bank
3.10. IMPORT PROCEDURE OF ETHIOPIA
i. Foreign currency approval process
 Proforma invoice
 Bank account or special license (investment, mining,
manufacturing)
 Apply for foreign currency through bank & wait
 Obtain approval for foreign currency

ii. Arrange method of payment with bank & get

permit
 L/C, CAD, Advance payment

65
3.10. IMPORT PROCEDURE OF ETHIOPIA
5. Shipment
6. Collect commercial documents

From supplier (for advance) or Bank (L/C or CAD)

Documents required for customs declaration
Type of document Name
Transport Bill of Lading, Airway bill,
bill of trucks
Value of Good Invoice
Bank document L/C, CAD, TT
Goods shipped Packing list
Country made Certificated of origin
Other Per-import permit, 66
investment license, etc
3.10. IMPORT PROCEDURE OF ETHIOPIA
7. Customs declaration
 Clearance customs declaration form:
 Information on import regime, goods information, tariff
classification and valuation
 Customs duty/valuation
 Based on duty paying price: (CIF or cost, insurance, freight)
 Import tax: base is CIF (Destination port) price
 Calculate tax by the importer:
 Tariff classification: goods classified
 Custom Valuation: value determined
 Duty calculation: respective percentage
8. Submit customs declaration: multimodal (one contract
with LSP with multiple modes) or Uni-modal: one
67
transport mode
3.10. IMPORT PROCEDURE OF ETHIOPIA

TAX TYPE % Description

Customs charge 0-35 For customs services/transferring boarder
Excise tax 10-100 Luxury, health risk, price inelastic
goods
Value Added (VAT) 15 Consumption tax
Flat rate for added value, exemption
Sur tax 10 is an extra tax or charge (Tax on tax)
For all goods with exceptions,
fertilizer, petroleum, etc
Withholding tax 2 For commercial use as partial
guarantee for tax payment or liability
on CIF value
68
MEANING OF TAX
Ad valorem (V) versus specific tax (S)
 The term “ad valorem” is Latin for “according to value,” which
means that it is flexible and depends on the assessed value of an
asset, product, or service.
 of the levying of tax or customs duties proportionate to the estimated
value of the goods or transaction concerned
 Specific tax: also unit tax is a specific tax amount per unit of a
product
 ad valorem taxes falls both on the fixed fee and the price per unit
whereas the specific tax only falls on the quantity sold and not on
the fixed fee.
Flat vs progressive tax rates
 A flat tax refers to a tax system where a single tax rate is applied to all levels of
income. 69
 Progressive: higher rate for high income classification
 Regressive: lower rate for high income classification
MEANING OF TAXES
 A surtax is an additional tax imposed by a
government on taxpayers, that is in addition to
another tax
 Value-added tax (VAT) is a consumption tax on
goods and services that is levied at each stage of
the supply chain where value is added, from
initial production to the point of sale
 Withholding tax: a deduction (as from wages,
fees, or dividends) levied at a source of income as
advance payment on income tax.

70
MEANING OF TAXES
 Value-added tax (VAT) is a consumption tax on
goods and services that is levied at each stage of
the supply chain where value is added, from
initial production to the point of sale
 Sales tax

 1/5 of government revenue

 Indirect tax (payer is not giving to authorities)

 Credit invoice (Invoice) or subtraction method

71
MEANING OF TAXES
 An excise tax is a legislated tax on specific goods or
services at purchase such as fuel, tobacco, and alcohol.
Excise taxes are international taxes imposed within a
government infrastructure rather than international taxes
imposed across country borders.
• Excise taxes are taxes required on specific goods or services
like fuel, tobacco, and alcohol.
• Excise taxes are primarily taxes that must be paid by
businesses, usually increasing prices for consumers
indirectly.
• Excise taxes can be ad valorem (paid by percentage) or
specific (cost charged by unit).
• Some excise taxes can be required directly from the
consumer like property taxes and excise tax penalties on
certain retirement account activities.
72
 3.10. IMPORT PROCEDURE OF ETHIOPIA
3.9. Pay and receive customs declaration from ECC
 Customs warehouse, services, approved declaration
or certificate for fulfilling import process
3.10. submit clearance to NBE: deposit for 5 years,
post audit, useful for future import/export

73
 3.11. IMPORT SPECIFIC LAWS
Tariff classification: to identify correct
commodity code (duty and tax) of import code for
good
 Two books (volumes) based on COMESA rate and
International Convention on the Harmonized
Commodity Description and Coding System (HS)

74
 3.11. IMPORT SPECIFIC LAWS
Custom valuation exceptions:
Differed/delayed import charges: storage container cost (10-
40 USD/day); demurrage cost (30-130 USD/day)
Temporary admissions: returnable deposit of taxes for
primary raw materials for manufactured goods. Return upon
move to free trade zone or export.
Exemption for temporary admission for sample/exhibits
Free trade goods exemption: Law 72/2004 goods for free
trade zone are exempted but pay duties if sold in domestic
market
Specific exemptions: Ministry of Defence, diplomat, cars
1800cc with medical equipment, government donation/gifts, 75
and imports for the presidency
CHAPTER FOUR: INCOTERMS,
INTERNATIONAL PAYMENT OPTIONS, AND
DOCUMENTS

Incoterms

Payment options

76
CHAPTER OBJECTIVE
 To acquaint students with knowledge of:
 INCOTERMS
 Pros and cons of INCOTERMS
 International payment options
 The advantages and disadvantages of international
payment options
 Essential import documents

77
4.1. INCOTERMS
 INCOTERMS is International Commercial
Terms
 is a universally recognized set of definitions

 developed by the International Chamber of

Commerce (ICC) in Paris, France.

 defines the trade contract responsibilities and

liabilities between buyer and seller.

 First published in 1936---INCOTERMS 1936- and

78
periodically revised
4.1. INCOTERMS

 Grouped into E, F, C and D, designated by the

first letter of the term (acronym), as follows:

Capital, small letters, with/out between dots

Group Term Stands for
E EXW Ex Works
F FCA Free Carrier
FAS Free Alongside Ship
FOB Free On Board
C CFR Cost and Freight
CIF Cost, Insurance and Freight
CPT Carriage Paid To
CIP Carriage and Insurance Paid To
D DAF Delivered At Frontier
DES Delivered Ex Ship
DEQ Delivered Ex Quay 79
DDU Delivered Duty Unpaid
DDP Delivered Duty Paid
80
4.1. INCOTERMS
Issues:
 Who takes responsibility of payment and risks along the
movement?
 Seller/Exporter: avoid uncertainty at buyer end (import duty,
transport at importer side) eg. D(DDP)
 Buyer: Avoid uncertainty at seller end (export duty, freight at
exporter) Eg. E (EX works)
 Have expert brokers/forwarders for uncertainity
 Therefore, determines the point in the logistics to
determine who:
 Owns shipment
 Cover costs
 Bears risk
 Costs:
 Freight (ocean and inland)
 Cargo Insurance
 Customs clearance, duty, and tax
 Loading/unloading
81
4.1. INCOTERMS
1. Ex Works (EXW) (+ the named place):
Ex= from; Works=factory, mill or warehouse (seller's
premises)
 Seller responsibility: avail at factory
 Buyer responsibility: loading, subsequent costs and
risks
2. Free Carrier (FCA) (the named point of
departure): up to a carrier point, departure terminal,
truck, railcar, air port
 Seller responsibility: avail up to the named departure
terminal, carrier place
 Buyer responsibility: main freight, insurance, loading,
subsequent costs, risk 82
 FoB for air, FoR, FoT; follow with specific name
4.1. INCOTERMS
3. Free Alongside Ship (FAS) (+ the named port
of origin): up to side of ship, dock, convenient place for
loading)
 Seller responsibility: avail along side ship/the dock
 Buyer responsibility: loading to ship, subsequent
costs and risks
4. Free On Board (FOB) (+ the named port of
origin): up to a port of shipment
 Seller responsibility: inland transport, charges, and load to
vessel
 Buyer responsibility: main ocean freight, insurance,
subsequent costs, risk
 FoB for ocean only per rule but also used in air
transport in practice
 FOB origin and FOB destination (North America) is 83
not INCOTERMS
4.1. INCOTERMS
5. Cost and Freight (CFR) (C&F) (+ the named
port of destination): up to the port of discharge
without insurance.
 Seller responsibility: ocean freight to destination port

 Buyer responsibility: insurance, import customs, and

subsequent costs and risks
6. Cost, Insurance and Freight (CIF): (+ the
named port of destination): up to a port of shipment
with insurance
 Seller responsibility: ocean freight, insurance to
destination port
 Buyer responsibility: import customs, subsequent 84
costs and risks
4.1. INCOTERMS
7. Carriage Paid To (CPT) (+ the named place
of destination): up to the named place on
importer side without insurance.
 Seller responsibility: transport to specified place
 Buyer responsibility: insurance, customs, tax,
and subsequent costs and risks
8. Carriage and Insurance Paid To (CIP) (+
the named place of destination):up to the
named place on importer side with insurance
 Seller responsibility: transport, insurance to
specified place
 Buyer responsibility: customs, tax, and
85
subsequent costs and risks
4.1. INCOTERMS
9. Delivered At Frontier (DAF) (+ the named
point at frontier):: up to point at the frontier.
 Seller responsibility: costs to specified point

 Buyer responsibility: import customs, tax, and

subsequent costs and risks
10. Delivered Ex Ship (DES) (+ the named
port of destination): up to the destination port
 Seller responsibility: Costs to destination on ship

 Buyer responsibility: unloading, insurance,

customs, tax, and subsequent costs and risks
86
4.1. INCOTERMS
11. Delivered Ex Quay (DEQ) (+ the named port of
destination): up to quay in destination port
 Seller responsibility: costs to specified point, import
customs, tax
 Buyer responsibility: insurance, and subsequent costs
and risks
12. Delivered Duty Unpaid (DDU) (+ the named
point of destination): up to buyers specified
premise/site
 Seller responsibility: Costs to specified point,
insurance
 Buyer responsibility: customs, tax, and subsequent 87
costs and risks
4.1. INCOTERMS
13. Delivered Duty Paid (DDP) (+ the named
point of destination): up to specified buyer
premise
 Seller responsibility: costs to specified point,
insurance, import customs, tax
 Buyer responsibility: subsequent costs and risks

88
4.1. INCOTERMS

89
90
91
92
 RULES FOR SEA AND INLAND WATERWAY TRANSPORT

Note:
• The DPU rule of 2020 replaces the DAT (Delivered at Terminal) rule in 2010.
• Transaction value as defined by the Customs Valuation Agreement is not equal to CIF. 93
• Rules of origin based on a CIF basis may be against the principle to respect the transaction value of
imported goods.
4.2. INTERNATIONAL PAYMENT
TERMS
Payment terms are crucial:
 Payment timing
 Document transfer timing
 Risk

5 types of payment terms and conditions:

1. Open Account

2. Documentary collection

3. Letter of Credit

4. Cash in Advance
94
4.2. INTERNATIONAL PAYMENT
TERMS

95
4.2. INTERNATIONAL PAYMENT
TERMS
Open account payment: the buyer receives the goods shipped by the
exporter and then makes the payment at the end of an agreed credit
period. 30, 60, and 90 days

96
4.2. INTERNATIONAL PAYMENT
TERMS
Documentary collection : Once the exporter ships the goods, they
can submit the shipping documents and a collecting order to the
remitting bank, who in turn will send these to the collecting bank
along with the collection instructions.
may be ‘at sight’ or after a time-lapse

97
4.2. INTERNATIONAL PAYMENT
TERMS
Documentary collection : Once the exporter ships the goods, they
can submit the shipping documents and a collecting order to the
remitting bank, who in turn will send these to the collecting bank
along with the collection instructions.
may be ‘at sight’ or after a time-lapse

98
4.2. INTERNATIONAL PAYMENT
TERMS
Letter of Credit: The buyer’s bank gives a written commitment to the
seller, called a Letter of Credit. It is an assurance to the exporter that
the buyer’s payment will be settled as per the agreed timeline and will
be subject to the agreed terms and conditions.
Revocable (modifiable by issuing bank) or Irrevocable (Modifiable
without consent)

99
4.2. INTERNATIONAL PAYMENT
TERMS
Cash in Advance: exporter ships the goods to the buyer only after the
receipt of payment from the buyer in full or partial.

100
4.2. INTERNATIONAL PAYMENT
TERMS
Consignment: is a variation of open account in which payment is sent to the
exporter after the goods have been sold by the foreign distributor to the end
customer

101
 THANK YOU!
102