A Discussion of the Economics of Preclearance with Proposed Measurement Methodologies

Abstract

This report has three objectives: summarize the international literature on the economic and social impact of preclearance operations; identify additional benefits of preclearance not well covered in the literature; and propose feasible methodologies to quantitatively measure the benefits to Canada of establishing preclearance processes and facilities in different environments.

Preclearance benefits have not generally been the subject of much measurement. Based on an analysis and literature review, benefits were classified in five categories: optimizing border resources; improving security; improving the experience of crossing the border for passengers; improving the experience of crossing the border for carriers; and generating ‘spin-off’ benefits. In general, benefits in the first four categories are additive, while the last category spans a wide range of beneficial impacts of preclearance which generally can only be assessed using input-output or computable general equilibrium models.

The report describes each benefit, identifies the main recipient of the benefit, and proposes specific methodologies to measure these benefits. For some benefits, in particular those related to security, the inherent difficulties in measuring the impact of preclearance leads the authors to suggest a qualitative treatment. Some preliminary estimates, based on heavy assumptions, are provided as a first step towards an accurate measurement of benefits.

Executive Summary

Preclearance refers to a process in which customs, immigration and other border functions of a foreign country (e.g. United States) are undertaken within a host country (e.g. Canada). Such operations can potentially generate significant benefits for governments, users and carriers. Preclearance benefits, however, have not generally been the subject of much measurement.

This report has three objectives: summarize the international literature on the economic and social impact of preclearance operations; identify additional benefits of preclearance not well covered in the literature; and propose feasible methodologies to quantitatively measure the benefits to Canada of establishing preclearance processes and facilities in various contexts.

Global Preclearance Operations

At the moment, air passengers can be precleared for US travel at eight Canadian airports. For marine passengers, preclearance facilities are in place in Vancouver (cruise terminal) and Prince Rupert, while US immigration pre-inspections are provided in Victoria and Sidney. For rail passengers, pre inspection facilities are in place only at Pacific Central Station in Vancouver. Air preclearance is formalized, while all other initiatives do not have a legal framework. Finally, a pilot project for freight pre-inspection is in operation, with Phase II currently taking place at the Peace Bridge, in Fort Erie.

In general, the policy objectives of preclearance are centered on issues of security, service and cost optimization, and international cooperation. Internationally, the US operates preclearance facilities in a number of countries, including Ireland and the United Arab Emirates. Mexican authorities also operate an air cargo preclearance facility in Texas. Otherwise, the only other preclearance operations known to the research team - the juxtaposed controls between the UK, France and Belgium - are centered on reducing the number of asylum seekers and illegal immigrants.

Identifying Benefits

In this study, benefits are defined to include the whole spectrum of positive consequences flowing from preclearance operations. Using this wide definition allows for a more complete understanding of the implications of preclearance and can better inform discussions of the policy. Casting such a wide net does mean, however, that these benefits must be reported with care as they are not necessarily additive. The report provides guidance on this issue.

Based on the analysis and literature review, benefits were classified in five categories.

• Optimizing border resources: Preclearance can lead to better utilization of resources which are a direct benefit for border agencies and provide direct budget relief.
• Improving security: Preclearance, by moving clearance to the perimeter, can lead to reduced threats and improved security.
• Improving the Border Crossing Experience for Passengers: Through more efficient border operations (faster, more reliable) and thanks to its unique characteristics (e.g. location of border clearance which can lead to reduced costs, more choices), preclearance provides clear advantages to passengers.
• Improving the Border Crossing Experience for Commercial Entities: Through more efficient border operations (faster, more reliable) and thanks to its unique characteristics (e.g. location of border clearance which can lead to reduced costs, more operational flexibility), preclearance provides clear advantages to carriers and airports.
• Spin-Off Benefits: These are benefits which flow directly or indirectly from the previous four categories. For example, reduced border costs for commercial operations can lead to increased trade or increased foreign investment. Reduced wait time for passengers can lead to increased tourism.

In general, benefits in the first four categories are additive, while the last category spans a wide range of beneficial impacts of preclearance which generally can only be assessed using input-output or computable general equilibrium models.

Measuring Benefits

For each category of benefits, a set of detailed benefits were identified through consultations and a literature review. They were documented, methodologies were proposed and potential data sources were identified. The following graphic summarizes the proposed methodologies to measure the main quantitative benefits. Of note, accurately measuring security benefits associated with preclearance requires strong assumptions about the role played by preclearance in preventing catastrophic events, assumptions which have no strong basis on which to be developed. For this reason, the research team recommends that these benefits not be quantitatively evaluated, although they could, but instead be assessed qualitatively.

In order to aggregate benefits, some of the benefits must be 'monetized,' i.e. transformed from qualitative units (e.g. minutes saved) to monetary benefits, and benefits over time must be brought within a common temporal unit, i.e. future streams of benefits must be expressed into a 'present value' amount (i.e. discounted). For monetization, the significant amount of research on the appropriate values to use for different types of benefits, as well as guidelines by the Treasury Board Secretariat (TBS), were leveraged. For discounting, the research team adopted the TBS guidelines which suggest using a rate of 8%. More details on the exact nature of the benefits, the nuance of the measurement methodologies and examples from the literature are provided in the report.

Image Description

Figure E-1: Summary of Quantifiable Preclearance Benefits and Overview of Measurement Methodologies

Five flowcharts look at benefits from optimizing resources from five perspectives: (1) benefits from optimizing border resources; (2) benefits of improved experience at the border for passengers; (3) benefits from improving security; (4) benefits of improved experience at the border for carriers and airports; and (5) other benefits. The first flowchart considers infrastructure costs and operational costs. The second flowchart looks at the combination of reduced wait times, improved reliability, and convenience and choice, which involves costs and time considerations. The third flowchart reviews three key items: (a) intercepting aliens, (b) intercepting illegal goods and (c) improved relations and information sharing. The fourth flowchart considers the combination of operational costs savings, lower terminal costs, lower inventory costs and increased spending, focusing on the benefits accrued from lower costs, number of trips, decreased waiting times and increased tourism spending. The fifth flowchart looks at other benefits including increased spending by tourists and tourism, possible environmental benefits accrued from reduced fuel consumption and local emissions.

Guidance on Application of Methods

Proposing specific methods to measure the benefits of preclearance requires establishing clarity and trading-off between a number of factors.

• Robustness and Availability: Is the focus on obtaining robust estimates, or should less robust estimates be produced based on available data? At what point should an estimate be excluded / included based on its level of reliability? What level of assumption is acceptable versus a requirement to use observed data?
• Scope: Are benefits measured only for Canada? For both the host and foreign country? Are benefits to international passengers counted?
• Focus: Is the measurement for benefits of existing activities or of proposed activities? Are benefits being measured for a single preclearance location or for all preclearance activities? Are they measured before implementation (i.e. potential benefits) or after implementation?

The report provides guidance and information on how each of these issues would impact the methodology proposed. One thing of particular importance is that it is almost impossible to accurately assess division between whether benefits accrue mostly to the host or the foreign country. As such, the research team strongly recommends that any framework adopted does not limit the scope of benefits (i.e. that it include benefits flowing outside Canada), leaving discussions of the distribution of benefits as a qualitative component of the assessment.

The report also identifies which benefits could be summed up, and which would better be the subject of a separate analysis. In a nutshell, benefits requiring input-output or computable general equilibrium modelling should be treated separately to avoid double-counting.

Conclusion

Potential benefits offered by preclearance operations are significant. Indeed, a very preliminary assessment of the preclearance facility in Toronto's Pearson Airport finds, based on a heavy set of assumptions which would be verified in any serious measurement endeavour, that measurable preclearance benefits for these operations could be of the order of $47.3 million per year, or nearly $570 million dollars over a thirty year period (discounted at 8% per year). Most of the significant government-related savings (infrastructure, operational, administrative savings), which accrue solely to the US, are not included in this total. All benefits measured are shared between Canadian and US carriers and passengers, as well as with some international passengers.

Of course, benefits can differ widely, both in their nature and their magnitude, based on the mode and the port of entry. In most cases, benefits to passengers and carriers are driven by the potential for faster customs clearance and the associated time saved. In the air sector, however, the additional operational flexibility leads to much larger benefits, both to passengers (increased choices) and airlines (terminal fees). The extent to which airlines are able to collect these benefits through higher fares (i.e. how the benefit is divided between passengers and airlines) is hard to establish.

In the trucking sector, the benefits associated with lower inventory carrying costs accruing to shippers are potentially significant. This benefit is contingent on saving time at the border.

In some cases, the benefits from lower infrastructure or operational costs could be particularly interesting for border agencies. Similarly, while too hard to accurately value, security benefits are potentially very significant.

Finally, it can be noted that other benefits, largely driven by the primary benefits noted above, can be measured using economic modelling. These models rely on a heavy set of assumptions and can be perceived as not being particularly transparent. On the upside, they do capture a number of impacts which are otherwise practically impossible to capture directly, including potential for improved productivity, improved competitiveness and increased tourism. Unfortunately, because of the methodologies used to measure these benefits, they cannot be meaningfully compared with or added to other measurable benefits, nor can they be compared to the costs of the project/facility. They could, however, be reported separately to inform the discussion about the value of preclearance initiatives to specific stakeholders and the wider economic competitiveness of the country.

Introduction

Background

What is Preclearance?

It is in the economic interests of governments worldwide to facilitate the fluid trade of goods and services and the freer movement of people by reducing the costs associated with international border crossings. This interest is explicit in the 2011 Canada-US Beyond the Border: A Shared Vision for Perimeter Security and Economic Competitiveness. Specifically, “Part 2 – Trade Facilitation, Economic Growth and Jobs” of the Beyond the Border Action Plan commits both countries to “develop additional initiatives for expediting legitimate travellers and cargo,” including developing a comprehensive approach to preclearance and pre-inspection, covering all modes of cross-border trade and travel.^{Footnote 1}

Canada and the US already have a number of joint or complimentary programs designed to reduce delays at border crossings through various levels of partial pre-approval prior to entry in each other’s country.^{Footnote 2} These programs facilitate – or are designed to facilitate – cross-border movements. In this respect, they can be thought of as “pre-processing” arrangements, but are not true border preclearance operations, as defined in the Statement of Work (page 9 of 34, RFP) for this study:

Preclearance refers to a process in which customs, immigration and other border functions of a foreign country (such as the United States) are undertaken within a host country (such as Canada).

At the moment, the only full and formal preclearance operations as defined above between Canada and US consist of US Customs and Border Protection (CBP) officials working in Canada making admissibility determinations prior to onward travel to the US in eight Canadian airports. A number of other Canadian locations are also conducting pre-inspection and informal preclearance/pre-inspection operations, including four ferry or cruise ship terminals, one rail station and road border crossings.

International examples of preclearance notably include US operations in airports in Ireland and the United Arab Emirates, Mexican operations for air cargo at Laredo, Texas, and British and French preclearance operations under their Channel Tunnel agreements.

Terminology for Preclearance Operations

From a legal perspective, the only preclearance operations in Canada are the ones conducted at airports. These operations cover the whole clearance process (immigration, customs, agriculture) and have a clear legal framework. They represent what can be called full preclearance operations.

All other cases mentioned in the report are either partial or informal preclearance operations. When they represent full preclearance operation, but do not have a legal framework, they are referred to as informal preclearance operations. When they represent partial preclearance, i.e. only immigration services are provided, they are referred to as pre-inspection operations. In some cases, they are both informal and partial. In these cases, they are also called pre-inspection operations, since these do not necessarily require a legal framework.

All other programs noted in the report fall outside the scope of preclearance, and are only noted to provide some context on the benefits that could accrue from similar operations. The table below summarizes the semantic applied to all Canadian preclearance operations.

Also worth of mention, throughout the report there are references to host country and foreign country. In the context of preclearance, the host country is the one where the preclearance facility or preclearance operations are located. The foreign country is the one whose officers are located in the host country. Canada, for example, is the host country for all Canada-US preclearance and pre-inspection operations, while the US is the foreign country.

Terminology and Stakeholders

Stakeholders consulted often understood the term “preclearance” to mean inspection and border activities occurring away from the physical border. In their mind, this included activities covered by the Integrated Cargo Security Strategy (ICSS) and other programmes requiring enrollment, but allowing for expedited processing (e.g. the Free and Secure Trade (FAST) programme). For some, it even included preprocessing and electronic data initiatives such as Advance Commercial Information (ACI) which lower transaction times at the border.

The term “reverse inspection” was most often used when discussing activities considered as preclearance, especially in the context of freight-focused preclearance initiatives. While this does not represent a challenge for the research, it is useful to note as it may be relevant to how authorities wish to communicate their findings to industry stakeholders.

Objectives

This study will help inform the Government of Canada on the benefit-measurement methodologies for preclearance operations. This information could contribute to the decision-making process for the establishment of new or more preclearance operations on either side of the border, support the evaluation of existing and future preclearance operations, help communicate the benefits of preclearance, and foster meaningful discussions among stakeholders, within and outside government, about the benefits of such operations.

As stated in the RFP Statement of Work (p. 10), the objectives for the project are thus as follows:

1. To summarize the international literature on the economic and social impacts of preclearance and pre-inspection operations that could apply to the Canadian economy and to Canadians, which shall include a comparison of similar preclearance operations and arrangements in other countries;
2. To identify and discuss other possible economic and social benefits of preclearance and pre-inspection operations not well-covered in the literature; and
3. To propose feasible methodologies to quantitatively measure the economic and other benefits to Canada of establishing preclearance processes and facilities in different environments on either side of the border (i.e., Canadian preclearance located in the United States and US preclearance located in Canada, in all types of border crossing situations).

Project Structure

The project is to be developed in three broad steps, as set out in Figure 1. This Final Report reflects the output of all project steps.

Image Description

Figure 1: Project Structure

A flowchart reviews three broad steps involved in the establishing the final report, which reflects the output of all three project steps. Following the project inception, identified as step 0, the author looks at the benefits of preclearance (step 1), the benefit measurement methodologies (step 2) and development of quantitative measurement methodologies for Canada (step 3).

Key Methodological Approaches

The methodology used in informing this report relied primarily on a review of literature as well as some consultations with key experts and stakeholders. Given the limited literature on the particular subject of preclearance benefit valuation, the research team extended the review to include benefits of other initiatives aimed at “thinning” the border, where appropriate.

To ensure that all the key literature was covered, border experts in Canada, the US and internationally were consulted. A list of the literature identified is included in Appendix A. A list of the stakeholders consulted is included in Appendix B.

Limitations

Given the nature of this project, most of the information herein represents findings from third parties which cannot be verified. While the research team do not warrant accuracy of third party data and findings, the team tried to the extent possible to validate it.

Another key limitation is the possibility that some portions of the literature may not have been fully covered. This is particularly likely for the literature outside the public domain, including but not limited to: private negotiations; limited distribution meetings and conference proceedings; and unpublished research. Moreover, some literature addressing these issues, but using alternative terminology or outside the scope of the team’s search, may have been omitted.

Unless otherwise stated, the opinions herein are those of the authors, and do not necessarily represent the views of Public Safety Canada or the Government of Canada.

Organization of this Report

The remainder of this report is organized as follows:

• Chapter 2: Global Preclearance Operations
• Chapter 3: Defining Benefits
• Chapter 4: Benefits and Impacts of Preclearance Operations
• Chapter 5: Measurement Approaches
• Chapter 6: Measurement Methodologies Identified in the Literature
• Chapter 7: Proposed Methodologies for Measuring Individual Benefits from Preclearance
• Chapter 8: Towards a Framework
• Chapter 9: Conclusion and Next Steps

The appendices follow.

Global Preclearance Operations

Canada-US Preclearance Operations

Brief History of the Program

Preclearance at Canadian airports for travellers bound for the US has a long history. Informal arrangements between the US and Canada were in place as early as 1952. That year, a pilot preclearance program was initiated at Toronto airport at the request of American Airlines. The airline believed that such a system would lead to better resource utilization.^{Footnote 3} This arrangement was extended and formalized through the Canada-US Air Transport Preclearance Agreement in 1974, with implementing legislation under the Preclearance Act of 1999. Since then, the two countries continued to cooperate with the signature of a new agreement in 2001, the Canada-US Agreement on Air Transport Preclearance.^{Footnote 4}

In recent years, however, preclearance operations for passengers and goods travelling with them have been extended to some ferry and rail operations across the country. At this time, no comprehensive agreement similar to the one for air transport is in place for these initiatives. The truck cargo pre-inspection pilot project, which is essentially a partial form of preclearance for freight, is governed by the framework provided by the Preclearance Act.

Program Application

While conceptually similar, the program for passengers^{Footnote 5} and commercial freight are fairly different in terms of their history, their implementation and, to a large extent, the benefits they generate. As a result, they are treated separately throughout the report, but similarities are noted.

Passenger Preclearance Operations

As noted earlier, preclearance is essentially the process by which all necessary border functions of a foreign country are undertaken within a host country. In the case of Canada and the US, preclearance has been primarily implemented in Canadian airports, with US Customs and Border Protection (CBP) agents, including immigration, customs and agriculture specialists, conducting preclearance operations. Canadian airports with preclearance facilities are Calgary International Airport, Edmonton International Airport, Halifax Stanfield International Airport, Montréal-Pierre Elliott Trudeau International Airport, Ottawa Macdonald-Cartier International Airport, Toronto Pearson International Airport, Vancouver International Airport and Winnipeg James Armstrong Richardson International Airport.

A key requirement of preclearance operations is the capacity to operate a “sterile” unit of transport, thus ruling out transportation with multiple stops before crossing the border. This limitation notably rules out a large number of train routes (e.g. the train from Toronto to New York stops at Oakville and Aldershot). In Canada, key rail services meeting that requirement originate out of Pacific Central Station in Vancouver and Central Station in Montreal. In Vancouver, partial preclearance (i.e. pre-inspection) services have been in place for a number of years for the Cascades service to Portland, with immigration and baggage inspection completed at the station, and customs’ inspections conducted on-board after the train crosses the border at Blaine, WA. A pilot initiative to conduct full preclearance of travelers and their baggage is being negotiated (EBTC (2011), p. 4). Montreal, on the other hand, has no preclearance program in place, although there is interest and it could potentially be implemented at a future date.

In the marine ferry and cruise sectors, informal preclearance is in place at Port Metro Vancouver and Prince Rupert. Preclearance from Vancouver serves a variety of lines, including those travelling to Alaska or those who have a first stop at a US west coast city (e.g. Seattle, San Francisco). The Prince Rupert preclearance is used for onward travel to Alaska.

Immigration pre-inspections are also provided at Victoria Inner Harbour for the service to Port Angeles, WA and at the port of Sidney for the service to Anacortes, WA. Customs and agriculture formalities are completed upon arrival.

In terms of land crossing, no preclearance facilities are in place for passengers.

Freight Preclearance Operations

Freight preclearance operations do not have the long history of passenger air transport preclearance. In fact, the CBP notes clearly on its website that its preclearance process is “…focused solely on passenger processing (no cargo)”.^{Footnote 6} In recent years, however, the focus on perimeter security and economic competitiveness has brought the question of freight preclearance forward.

While negotiations have been ongoing since the early 2000s, it is only very recently that a pilot project has been implemented for freight pre-inspection. In particular, a pilot project in two phases for truck freight pre-inspection is currently in operations. Phase I ran at the Pacific Highway near Surrey (BC) from June 2013 to January 2014 (official end on January 2), and Phase II has been in operations since February 2014 at the Peace Bridge, in Fort Erie. In both locations truck pre-inspection is possible since travel between the Canadian crossing and the US border is ‘sterile’ (and very short). Of particular note, these operations do not involve only cargo clearance, but also the pre-clearance of drivers and passengers. The pilot is not considered full preclearance since an accelerated inspection and all secondary inspections are still done in the US.

It can also be noted that other operations of a very similar nature have been put in place at other locations in Canada for cargo between Canada and the United States. Indeed, as part of the 2011 Beyond the Border Action Plan, Canada and the US committed to developing a joint strategy under the principle of “cleared once, accepted twice.” The Integrated Cargo Security Strategy (ICSS) is “aimed at identifying and resolving security concerns as early as possible in the supply chain or at the perimeter, with the expectation that this will allow us to reduce the level of these activities at the Canada-US border.”^{Footnote 7} Clearly, the ICSS implementation is conceptually very similar to preclearance operations, with inspections occurring away from the border on host country soil. In fact, many stakeholders refer to these pilot projects as “cargo preclearance”.

At the moment, the two pilot projects under the ICSS are in Montreal and Prince Rupert. Unlike preclearance operations, which involve US officials operating on foreign soil, pre-inspections for ICSS are done by CBSA officers on behalf of CBP. Containers moving by truck from the Port of Montreal to the US are inspected and secured with high security bolt seals for transit through Canada to the border, eliminating the need for a duplicate inspection at the border. The same process is used in Prince Rupert for container trains bound for the US. It is important to note, however, that these pilot projects are not preclearance operations. Not only does the absence of CBP officers on Canadian soil makes it fundamentally different from a legal perspective, it also does not involve any immigration clearance. These activities are thus excluded in the analysis.

Future Preclearance Applications

At the moment, Canada-US preclearance operations are all located in Canada (i.e. only US-bound passengers and goods). Hence, it generally involves the construction of infrastructure in Canada instead of the US. It also generally involves an increase in the overall infrastructure capacity of the system which would not otherwise be possible. For example, preclearance facilities for the Peace Bridge in Fort Erie are meant mainly as a means to improve US CBP facilities, which are severely land-constrained in Buffalo leading to issues with border congestion and a bottleneck at the border. Similarly, preclearance facilities in Canadian airports reduce the need for processing capacity in US airports. As a result, preclearance facilities are generally considered only for high-volume border crossings.

In the future, one could imagine setting up preclearance facilities for entirely different reasons. For example, facilities could in fact represent the combination of CBSA and US CBP services on one side of the border, with one officer providing immigration and border services for travellers in either direction. This could effectively halve infrastructure and operational costs, potentially improving the viability (or extend the service hours) of smaller border crossings.

Stated Policy Objectives

In both Canada and the US, the stated objectives are centered on issues of security, service optimization and international cooperation. More specifically, the US CBP notes six key objectives for its preclearance operations.

• “Prevent terrorists, terrorist instruments and other national security threats from gaining access to the US.
• Intercept inadmissible persons and goods before boarding US-bound conveyances.
• Protect US agricultural infrastructure from foreign pests, disease and global outbreaks.
• Facilitate entry of legitimate trade and travelers across our US borders.
• Reduce congestion at US “gateway” airports and support domestic connections.
• Foster cooperation with foreign (host) authorities in trade, diplomacy, law enforcement and security.”^{Footnote 8}

In Canada, the main stated purpose of these operations, as per the Preclearance Act of 1999, is “to facilitate the movement of travellers and goods between Canada and the United States” (p. 3).^{Footnote 9} While the statement remains fairly general, it is well-aligned with the objectives mentioned by the US CBP, which suggests that these same objectives likely reflect the considerations of Canada.

Global Preclearance Operations

When preclearance is taken strictly as a process in which customs, immigration and other border functions of a foreign country are undertaken within a host country, there are very few comparable operations across the globe. In addition to US CBP preclearance operations outside Canada, the only other known example is the juxtaposed controls between France (Calais) and the United Kingdom (Folkestone) for travel on the Eurotunnel route.

Otherwise, a number of programs with similar policy objectives, but different reach and implementation strategies, also exist. For example, the UK did set up immigration preclearance with the Czech Republic in Prague in July 2001, but the program was stopped in February 2003. Other programs include immigration preclearance on the Eurostar routes (as part of juxtaposed controls), efforts to ‘thin the border’ between Canada and the United States, the Schengen area in the European Union (EU), international standards to promote secure and seamless supply chains (the SAFE program), etc. The following sections provide a brief overview of these programs and their similarities to preclearance operations between Canada and the US. This review contextualizes the Canadian experience, and will help identify literature on the measurement of benefits of a similar nature to those generated by preclearance operations in Canada.

Other US Preclearance Facilities

Overview

The US CBP operates seven other preclearance facilities throughout the world, with very similar policy objectives to those operated in Canada.

Outside Canada, the US CBP operates preclearance facilities at Dublin and Shannon airports in Ireland, at Nassau and Freeport in the Bahamas, at Aruba and at L.F. Wade International Airport in the Bermuda and, most recently, in Abu Dhabi airport.^{Footnote 10}

Policy Objectives

These preclearance facilities and operations are essentially identical to those operated in Canadian airports. From the US perspective, the public benefits sought are identical,^{Footnote 11} and the decision-making process follows a similar logic to the one used to establish operations in Canadian airports.

It is worth noting that the implementation of a preclearance facility in Abu Dhabi raised a number of concerns in the US since no US carriers serve that airport. While the benefits of the policy in terms of security, fluidity and cooperation are significant, potential commercial benefits would accrue to a foreign carrier, with potentially negative impacts on domestic carriers. These concerns, however, have not to-date proved sufficient to prevent the implementation of the facility.

US-Mexico Freight Preclearance Facilities

Overview

In 2012, the Mexican government introduced new legislation authorizing Mexican Customs preclearance at the Laredo International Airport in Texas. The airport, which is located at the border of Texas and Mexico, now has a Mexican Customs facility with Mexican agents, allowing it to effectively clear air cargo bound for Mexico at the US airport. Because of its location at the border with Mexico, the facility also allows the airport to receive cargo from anywhere in the world, have it cleared by Mexican Customs, and then flown or trucked to Mexico. The first shipment under the Mexican Customs program departed the Laredo International Airport to Guanajuato, Mexico, on December 20, 2012 (Flores, 2012).

In 2013, two other pre-inspection initiatives between Mexico and the United States were also put forward but are still to be fully implemented.^{Footnote 12} In both cases, the initiatives are CBP pre-inspection activities in Mexico.^{Footnote 13} In particular, a pilot at the Otay Mesa road border crossing in Mexico will house CBP officers who will provide screening for selected goods trucked over the border (i.e. perishable goods that are time sensitive, such as strawberries, tomatoes, etc.). The other initiative would have CBP officers working on the campus of the company Foxconn to clear goods for entry at Santa Teresa in New Mexico.

Policy Objectives

From a supply chain perspective, major gains in efficiency are possible as a result of the Laredo preclearance facility since goods can now be flown directly to their destination, without the need to use an international airport in Mexico with inspection capabilities. This reduces costs and increases choice for shippers, who can now use air transportation more efficiently, sometimes even replacing road logistics. From an airport’s perspective, the gain in competitiveness is not trivial since cargo previously flown to Mexican international airports can now be rerouted to the Laredo airport for clearance and further shipping.

The other two initiatives, at Otay Mesa and near Santa Teresa, share the main common objective of expediting clearance and reducing delays for northbound shipments for selected goods.

Juxtaposed Controls

Overview

Juxtaposed controls refer to an arrangement between the UK, France and Belgium for foreign officers to provide immigration preclearance on certain cross-Channel routes before boarding the train or ferry, rather than upon arrival after disembarkation. These controls were first set up between the UK and France, following the 1991 Sangatte Protocol which provided for a French border checkpoint in Folkestone, UK and a British border checkpoint in Calais, France. This was in preparation of the opening of the Eurotunnel in 1994, which facilitated the illegal entry of people from the continent to the UK given little to no immigration controls are done before boarding trains.

On that route, namely the Eurotunnel rail route between Folkestone, UK and Calais, France, full preclearance is provided, with both immigration and customs checks completed before boarding the train. This is the only example of preclearance fully analogous to US CBP operations throughout the world that was found. Juxtaposed controls do, however, encompass other immigration preclearance operations between the three countries, with foreign officers on the ground. The following operations are notably covered:

• Eurostar services (rail) between French and UK stations, following an agreement in 2000 (Additional Protocol to the Sangatte Protocol)
• Cross-channel ferry service between Dover, Calais and Dunkirk following a treaty signed in 2003 (known as Le Touquet Treaty).
• Rail service between the UK and Brussels Midi station, following a tripartite agreement in 2004. Of note, Belgian immigration checks (for the Schengen area) are done by French officers.

In all cases, customs checks remain unaffected, and as such this does not represent ‘full preclearance.’ These operations do not generate the same benefits in terms of fluidity as full preclearance would, since travellers must still proceed to a sterile area for customs clearance on arrival.

Policy Objectives

In fact, it is important to note that the relative importance of the different policy objectives of juxtaposed controls arrangements is different than those put forward by Canada and the US for similar operations. While security and cooperation remained key objectives for the UK, France and Belgium, the central objective was to better control the flow of illegal immigrants and asylum seekers to the UK. Moreover, fluidity was not a particular concern.

Indeed, these efforts followed on the heels of an experiment conducted in Prague in the Czech Republic. In July 2001, the UK government set up immigration preclearance facilities at Prague airport. The objective was to diminish the number of Roma asylum seekers, as noted in an official Home Office Statement:^{Footnote 14}

The scheme was implemented from 18th July as a flexible and short term response to the high levels of passengers travelling from Prague who are subsequently found to be ineligible for entry to the UK… In the three weeks before preclearance was introduced there were over 200 asylum claims (including dependants) at UK ports from the Czech Republic. In the subsequent period (during preclearance controls) our provisional figures show that there have been in the region of only 20 claims. More than 110 people were refused leave to enter the UK in Prague during the period preclearance has been in operation.

When asylum seekers are refused entry from a location outside the foreign country (the UK in this case) the obligations of non-refoulement do not apply.^{Footnote 15} In this case, preclearance is one way in which to quell the number of asylum seekers and illegal immigrants.^{Footnote 16} In this specific case, the scheme was deemed to be discriminatory on racial grounds by the England and Wales Court of Appeal, and was discontinued in February 2003.^{Footnote 17} Nonetheless, it appears clearly that in the case of juxtaposed controls, and unlike what is stated for Canada-US preclearance where objectives are multiple, the main and sometimes sole objective remains focused on controlling the flow of illegal immigration.

Other Relevant Programs

A number of other programs have been put in place in North America and around the world to achieve some of the same benefits that preclearance provides. Most of these programs focus on security and fluidity issues, with a few bilateral programs also requiring significant cooperation across nations. In the large majority of cases, the programs focus on one of these three processes:

• Processing documents upstream on the border crossing process (pre-processing)
• Developing ‘trusted participants’ who benefit from lower border crossing scrutiny and lower associated costs; or
• Recognition by one country of another’s border control programmes or process,^{Footnote 18} as is the case for the ICSS pilots at Prince Rupert (rail) and the Port of Montreal (trucks).

Freight-focused programs generally facilitate customs’ procedures, while passenger-focused programs generally facilitate immigration procedures, leaving the other largely untouched.

Table 1 provides a brief description of a selection of these programs, and their similarities to preclearance. This review on border programs with similar objectives will help identify literature on the measurement of benefits of a similar nature to those generated by preclearance operations in Canada.

1. i For more information on the Schengen Area, see http://europa.eu/legislation_summaries/justice_freedom_security/free_movement_of_persons_asylum_immigration/index_en.htm (accessed on February 5th). For more information on Frontex, see http://frontex.europa.eu/ (accessed on February 5th).
2. ii For more information on the NEXUS program, see http://cbsa-asfc.gc.ca/prog/nexus/menu-eng.html (accessed on February 5th).
3. iii For more information on the FAST program, see http://www.cbsa-asfc.gc.ca/prog/fast-expres/menu-eng.html (accessed on February 5th).
4. iv For more information on SAFE, see http://www.wcopscg.org/wco_safe_package.html (accessed on February 5th).

Defining Benefits

This chapter provides the reader with a clear understanding of what is, and what is not, a benefit. To this end, a high-level review of the different conceptual approaches used to measure economic consequences is first provided. It is followed by a more in-depth discussion of some of the key issues which can have significant impact on the measurement of these benefits.

Conceptual Approaches

In general, businesses assess investment opportunities based on a financial analysis. A financial analysis takes into account only the costs and revenues of a project accruing to its proponent (also called ‘internal’ costs and benefits, as they are internal to the project). While a financial analysis is essential to establish the commercial viability of a project, it fails to take into account the non-market (also called ‘external’) effects of the project (e.g. pollution, accidents, etc.). As such, from a public policy perspective the financial analysis is a very restrictive indicator of whether a project should or should not go ahead.

Key Concepts and Tools

Broader concepts and tools are typically used by governments to assess projects when these are intended to deliver benefits to the public and the economy more broadly. The three approaches most commonly used are the Cost-Benefit Analysis (CBA), the Economic Impact Analysis (EIA) and the Economic and Social Impact Assessment (ESIA).

The key difference between a CBA and an EIA is that the former attempts to capture all benefits and costs accruing to society from a project without double counting (see Section 0), while the latter attempts to assess the impact that the flow of money will have on the local, regional, or national economy (e.g. input-output models). In many occasions, the scope of an EIA is widened further to include a variety of economic and social impacts which go beyond the simple ‘flow of money.’ These wider assessments, called “Economic and Social Impact Assessment” (ESIA), often include many components of a CBA, but with no concerns for double-counting. It also generally focuses on some of the distributive impacts of projects, and the impacts it may have on markets (e.g. real estate, competition, etc.) and society. Figure 2 summarizes some of the components generally covered under a financial analysis, a CBA, an EIA and an ESIA.

Source: CPCS Analysis. * In cases where labour markets are significantly distored, the difference between actual and shadow wages is taken into account in CBAs.

Avoiding Double-Counting in Cost-Benefit Analysis

When conducting a CBA, the main concern is to avoid double-counting. For example, a new road provides benefits for users in terms of time and transportation cost savings. If a toll, or another user charge, were to be implemented, revenues from the toll should not be counted as an additional benefit. Indeed, a toll will simply transfer a portion of the benefits of the new users to the operator. The negative effect of a toll on traffic, however, should be taken into account as to reflect the actual benefits that will be derived from the new facility (less users will benefit).

While the capacity of the operator to raise revenues through user fees has no impact (other than through traffic projections) on the CBA, it may have significant implications on the financial feasibility of the project. It can be important to determine whether the project can generate enough revenues to sustain its operation or whether sustained government intervention will be required.

Purposes and Uses

It is particularly important to understand the purpose of these different types of analyses. A CBA is a formal tool used to identify the most economically efficient alternative. An EIA follows a ‘flow of money’ logic, establishing the impact of spending on the local economy. An ESIA informs policy-maker about the effects of their policy choice on a wide spectrum of issues.

CBA is in nature comparative, and its goal is to identify the most economically efficient investment alternative, i.e., the one that maximizes the net benefits to the public. It aims to inform decision-making by establishing whether a project should be undertaken, or which project should be undertaken from a set of options. The benefit-cost ratio is the summary statistic which establishes whether the benefits of a project outweigh its costs (i.e. if it is larger than 1.0). It also allows projects to be evaluated on a comparable basis. A CBA is built around a formal framework which ensures the consistency and validity of the results. This reduces the flexibility of the analyst, but it allows CBA to be used as a reliable decision-making tool.

An EIA is different from a CBA. It is not a decision-making or comparative tool. Indeed, it is rather generally used as a regional advocacy analysis, showing how much a specific region will benefit or is benefiting from a given project/spending/activity. It is particularly popular in communication material for public and private projects and companies. This type of analysis is narrowly focused on the “flow of money” resulting from direct (capital and operational costs) and indirect (e.g. tourism generation, spending by individuals working on the project) project spending. In these cases, economic models, most often input-output models, are used to measure how this spending will be distributed (imports, export and local spending by industry), and what will be the likely impact in terms of employment, gross domestic product (GDP), income and tax revenues for a given geography. Since economic impacts are not an additive concept, there is no concern about double-counting. In the same vein, the economic impacts should not be compared to costs as there is no theoretical relationship between the two concepts.^{Footnote 19}

ESIAs, on the other hand, attempts to assess the economic consequences that a project will have in a given area. Like the EIA, it does not provide information as to whether a project is economically efficient or not, but rather informs policy-maker about some key effects of their policy choice. An ESIA is not based on a formal framework and there are no formal limits as to what can/should be considered. While this provides flexibility to the analyst, it also weakens the conclusions that can be drawn from an ESIA. Indeed, the absence of a firm, recognized and accepted framework may limit the comparability of findings across projects, increase the likelihood that assumptions and approaches are inconsistent across time or subject, and open the door to analytical biases favouring a preferred outcome.

What is a Benefit?

Academic Definition of Benefits

In general, an economic benefit is taken to be the set of ‘benefits’ computed as part of a CBA. It thus excludes the economic impact on a given region, since these impacts are the result of increased spending by entities that would otherwise be spent elsewhere (‘a transfer’). It also avoids counting ‘benefits’ twice, thus not providing the full spectrum of economic consequences included in an ESIA. Indeed, as noted as an example before, if the travel time savings are computed, the impact on real estate prices of a shorter drive cannot be included as an additional benefit.^{Footnote 20}

Study Definition of Benefits

For this study, benefits are defined much more broadly to include the whole spectrum of positive consequences flowing from preclearance operations. In other words, the initial identification of benefits will be more in line with an ESIA process. The definition excludes, however, negative consequences as well as project costs, as they are on the other side of the equation and fall outside the scope of the study. Using this wide definition will allow for a more complete understanding of the implications of preclearance and will better inform discussions of the policy.

It is important to note, however, that when developing a methodology to assess the benefits of preclearance operations, the team will root its approach in more formal processes observed in the literature, in particular the CBA and EIA processes. This will ensure that the methodology proposed is credible and can sustain the scrutiny of academics and the public.

Benefits and Impacts of Preclearance Operations

As noted in Section 0, the potential applications of preclearance are varied. The range of options for new preclearance operations encompasses facilities and services to preclear passengers or cargo, located in Canada or the US, and operations which increase or reduce the level of service. As such, preclearance operations cannot be evaluated in a single way.

Similarly, knowing the nature of the preclearance operation is essential to better understand which benefits are more or less likely to be realized. While this issue is of high relevance when it comes to measuring benefits, it is less problematic for identifying benefits. The next section identifies five key categories of benefits of preclearance. It is followed by an inventory of benefits, by category. For each benefit, the mechanism through which preclearance is believed to produce the benefit is explained, references to the literature are provided, and the major recipients of the benefit are identified.

Categorizing Benefits

The potential benefits of preclearance can be categorized in many ways. For example, categorization can be structured around the policy objectives or around the main recipient of the benefit. For the purposes of this study, a hybrid approach was developed.

First, a long list of benefits was identified based on the literature. Then, based on this list, the different channels through which benefits are generated were identified. Four primary channels were identified.

1. Optimizing border resources: Preclearance can lead to better utilization of resources which are a direct benefit for border agencies and provide direct budget relief.
2. Improving security: Preclearance, by moving clearance to the perimeter, can lead to reduced threats and improved security.
3. Improving the Border Crossing Experience for Passengers: Through more efficient border operations (faster, more reliable) and thanks to its unique characteristics (e.g. location of border clearance which can lead to reduced costs, more choices), preclearance provides clear advantages to passengers.
4. Improving the Border Crossing Experience for Commercial Entities: Through more efficient border operations (faster, more reliable) and thanks to its unique characteristics (e.g. location of border clearance which can lead to reduced costs, more operational flexibility), preclearance provides clear advantages to carriers and airports.

These channels are, in effect, direct categories of benefits. From these benefits, a number of ‘second-order’ benefits can be generated. For example, reduced border costs for commercial operations can lead to increased trade or increased foreign investment. Reduced wait time for passengers can lead to increased tourism.

5. ‘Spin-off’ benefits: Third and fourth-order benefits are also possible. For example, reduced operational costs (first-order) may make a particular transportation service viable (second-order), which in turn can increase tourism (third-order). The new service and increase tourism will in turn generate jobs and economic activity (fourth-order).

Inventory of Benefits

Optimizing Border Resources

From a budgetary perspective, the actual costs of managing the border are not insignificant. They include infrastructure as well as operational costs. These costs can be dramatically affected by the decision to proceed with preclearance, particularly in locations where space constraints and land costs differ in the home and host countries.

Conceptually, preclearance opens a new set of options as to where clearance can occur. Indeed, the US CBP or CBSA can now decide to conduct clearance at any point in the supply chain (or travel chain for passengers), as long as there is a way to maintain the sterility of travel^{Footnote 21} between the preclearance area and the usual clearance area. In short, new preclearance options mean that lower-cost options can be implemented.

The documentation reviewed identifies three sets of potential benefits for border agencies: (1) lower infrastructure costs; (2) lower operational costs; and (3) partial reimbursement of costs. Table 2 documents such benefits.

Improving Security

Security is at the centre of border management policies in the US, Canada and across the world. Increased security can be achieved through an improvement in information sharing and international relations, or through the early interception of threats.

The US CBP notes in its preclearance factsheet^{Footnote 22} three security-related objectives:

1. “Prevent terrorists, terrorist instruments and other national security threats from gaining access to the United States;
2. Intercept inadmissible persons and goods before boarding US-bound conveyances; and
3. Protect US agricultural infrastructure from for­eign pests, disease and global outbreaks.”

These benefits are mentioned at numerous occasions in the literature. For example, US GAO (1980) mentions improvement in international relations as a motive for preclearance operations. The US GAO (2008, p.9), when discussing the potential for a US CBP facility in Fort Erie, noted that “shared border management would have also enabled informal information sharing between US and Canadian border inspection officials because the inspection facilities would be located adjacent to each other.” The capacity to “interdict illegal products before they enter the US” and “to interdict inadmissible aliens before their departure for the US” are also noted by US GAO (1980, p.393). The reduction in the risk of immigration fraud is a similar benefit which is noted as one of the key objectives of preclearance operations in the UK.

It is important to note that these benefits are, for the most part, only primary consequences. The control of terrorism, pest and illicit goods, and illegal immigration in the host country translates into benefits largely because they minimize the incidence of catastrophic events: terrorist attacks, spread of foreign pests and disease outbreaks. The actual benefits are thus focused on the reduction in the incidence of loss of life, morbidity, business interruption, property damages and other economic harm.

Table 3 documents these benefits.

Improving the Border Crossing Experience for Passengers

For passengers, the value proposition of crossing the border depends on a number of factors. Time, cost and reliability come high on the list of these factors. Otherwise, convenience and flexibility are also important. Table 4 documents these benefits in details, and they are summarized here.

Preclearance operations provide potential benefits on all aspects of the value proposition. Indeed, costs for customers (passengers, shippers) can be reduced if carriers’ savings (see next section) are transferred through lower prices.^{Footnote 23} For passengers, the capacity to clear the border at the beginning of the trip is also a significant benefit since it allows them to better control their fate – in the air sector, if clearance delays are instead incurred at an in-transit airport, issues with connecting flights can be significant, leading to significant frustrations and additional costs.^{Footnote 24} Finally, preclearance provides more flexibility and choice to many passengers, who see their option for direct flights from Canadian airports expanded significantly.

In addition to these benefits for passengers using preclearance, it is important to note that passengers not using preclearance may also benefit. Indeed, by reducing lineups at major hubs, preclearance also has the potential to reduce wait times for other passengers using these hubs.

Improving the Border Crossing Experience for Commercial Entities

Carriers and airports can generate significant benefits from preclearance operations. Indeed, the first preclearance operation in Canada was born out of a request by a US air carrier to improve the efficiency of their operations. To this day, preclearance operations in the air mode are generally the result of carriers’ requests. For example, the most recent preclearance US CBP facility in Abu Dhabi was in no small part the result of Eithad’s request and willingness to cover a significant portion of the costs.

The business case for preclearance operations is based on the capacity to generate significant commercial savings. These operational savings are generally related to the capacity for carriers to better use their assets by reducing cycle times, or to generate additional revenues by developing more appealing routings. For airports, the capacity to offer such savings to carriers is definitely a competitive advantage which makes it easier to attract new carrier services.

In the air industry, reduced operational cost savings are related to the fact that preclearance terminals and domestic terminals tend to be less congested than international terminals at major hubs, hence reducing delays and improving equipment utilization rates. Direct savings are also generated by using less expensive domestic terminals, instead of busier international terminals. Operational savings may also be produced when direct routings replace indirect hub-and-spoke routings. Of note, these savings do not require a reduction in the processing time at the border.

In the trucking industry, however, savings are directly related to the efficiency of clearance activities. Indeed, saving depends on the capacity of the preclearance facility to reduce and increase the reliability of wait times. If wait times cannot be reduced, commercial benefits are generally eliminated.

In the rail industry, a reduction in border delays is not necessary to generate carrier benefits. Indeed, because clearance occurs at the terminal for passengers, equipment is not necessarily tied up during preclearance, while it necessarily is if clearance occurs at the border crossing. For freight, with preclearance occurring at the perimeter, even if the process is not faster, the early warning of delays means that operations may be able to make up time and still meet their arrival times. If they can’t, the downstream supply chain can be informed earlier, and thus consequences can be mitigated.

Finally, in the marine industry, as with other industries where clearance does not occur on-board, operational savings are not dependent on a more efficient clearance process.

Table 5 documents these benefits.

Generating ‘Spin-Off’ Benefits

As noted earlier in the chapter, a number of ‘second-order’ benefits can be generated if preclearance does indeed reduce wait times and improve commercial operations.

This section documents some of the most common form of impacts that can result from primary benefits. These include economic benefits, environmental benefits, benefits flowing to governments in the form of increased taxes, tourism impacts, etc. In many cases, the literature provides limited examples of these benefits, since they are of the second-order. They are, however, essential to better understand the wide range of impacts that preclearance can have on communities and on the economy as a whole.

Table 6 documents these benefits.

Measurement Approaches

Review of Benefits Typology

It has been noted that only benefits measured in a cost-benefit analysis (BCA) are generally considered primary benefits. In some cases, the decision as to which benefit is primary and which is secondary is arbitrary, since these benefits are often related or in fact the same.

A good example is the benefit of a shorter commute time related to a transit station in proximity of a neighbourhood. The primary benefit is generally reduced transit time (i.e. time saved). A secondary benefit is increased property values, which are the direct result of the time saved. Because measuring changes in property values is sometimes easier than measuring and valuing time saved, the latter can be used as a proxy to measure the primary benefit. As long as both benefits are not considered cumulative, choosing one over the other is more a methodological choice.

In the case of preclearance, user fees are a prime example of this process. Indeed, if airlines are paying user fees for preclearance facilities, one can assume that commercial benefits are at least sufficient to cover these fees (otherwise airlines would not have requested these facilities). In the absence of a firm estimate of commercial benefits, user fees thus provide a lower-bound estimate of the associated commercial benefits. In other words, while user fees can be used as a way to measure commercial benefits, user fees and commercial benefits cannot be considered jointly.

Once primary benefits are identified, the analyst is generally left with a number of secondary benefits which can be used to promote an initiative. These secondary benefits are alternatively called direct, indirect or induced impacts (i.e. results of spending), or ‘spin-off’ benefits.

These other benefits can be identified as such for one of two reasons:

• They are a consequence of a primary benefit, and as such are often already captured by the measurement of that benefit. For example, increased reliability at the border may allow business people to lower the number of meetings they miss due to border delays. The value attributable to reliability is a function of the value people put on such things as not missing a meeting. Measuring the value of increased reliability and that of not missing meetings would count benefits twice.
• They reflect a displacement of, rather than an actual increase in, economic activity. For example, if infrastructure spending for clearance facilities is done in the host country instead of the foreign country, economic activity increases in the host country, but is reduced in the foreign country. It is, in effect, a transfer.

The list of these types of secondary benefits is large and providing a comprehensive list of such benefits is not possible here. The research team nonetheless report on the some of the most-oft quoted benefits in the literature reviewed, and propose methodologies to value them.

Measuring Individual Benefits

Benefit measurement involves two key steps: (1) identifying the process generating the benefit and (2) assessing the benefit’s magnitude using a quantifiable metric. While the process is generally fairly straightforward for primary benefits, it can be more complex for secondary or ‘spin-off’ benefits.

Primary Benefits

The first step is to clearly identify the benefit and the process which generates it. In most cases, it involves comparing a ‘reference case’ (i.e. without the project, facility or process) to a ‘with project’ case. In the case of preclearance, since the clearance process is essentially identical to normal clearance, benefits are generally related to the location of clearance. The ‘reference case’ is thus clearance at existing locations, while the ‘with project case’ is clearance at the new preclearance location. Information about both cases is essential to be able to assess benefits.

For example, in the literature on border issues, the impact of different processes or policies on time spent at the border crossing is one of the most-oft measured benefits (or costs). As noted, since the clearance process is essentially identical to normal clearance, time savings are related to the characteristics of the different locations where clearance can occur under the ‘reference’ and the ‘with project’ case. In other words, time savings are realized if preclearance occurs at a location in the host country which is either less congested and/or more efficient than the alternate facility in the foreign country where clearance would normally occur.

Understanding the benefit and delineating the process through which the benefits are produced allows one to identify ways to measure the magnitude of the benefits. In the example provided above, it is clear that a measure of processing times at the preclearance location in the host country, but also at alternate clearance locations in the foreign country, will be necessary to assess the magnitude of comparative time-savings benefits. The benefit will most likely be measured in minutes. The benefit per passenger will likely be expressed in minutes per passenger, while the benefit for time saved by carriers, in instances where the clearance process affects equipment and staff, will likely be expressed in minutes per trip.

Spin-Off Benefits

The measurement approach for spin-off benefits is essentially the same. In general, however, the channels through which benefits are generated are much more complex. This, in turn, makes their measurement more sensitive to the assumptions used.

In the preclearance literature, time saved by passengers and carriers through preclearance is shown to translate into a much more attractive transportation option for passengers. It is, for example, one of the key arguments put forward to support rail preclearance operations between Montreal and New York. As a separate benefit, supporters of preclearance on that corridor note the beneficial impacts on tourism. Increased tourism, however, is contingent on an improvement in the value of the transportation option to passengers, either through time saved, increased reliability, improved convenience or lower prices, which are necessary to increase tourism. This makes increased tourism a ‘spin-off benefit’.

Obtaining an estimate of the impact of preclearance for tourism on that corridor requires the following:

• an estimate of the improvement in the transportation option;
• an estimate of the increase in passengers resulting from the improvement;
• an estimate of the actual increase in tourists from the increase in passengers. Indeed, some may now choose to travel by rail instead of air, and thus not represent an increase in tourism;^{Footnote 25} and,
• an estimate of spending by an average tourist to estimate an overall increase in spending. This generally relies on estimates of the number of days and nights spent at the destination, along with average spending per day.

The estimate of increased spending by tourists (called ‘direct impacts’) would then be inputted in a model to estimate the direct, indirect and induced tourism impacts of preclearance in terms of jobs and economic activity (e.g. GDP). Clearly, the number of steps involved, and in particular the high number of steps where observed estimates are unlikely to be available (thus requiring an assumption), make such estimates less robust than a relatively simple estimate of time saved by passengers.

In this specific case, it is also useful to note that tourism impacts represent a displacement of benefits. Indeed, since tourism money spent in one location will go unspent elsewhere, it is generally considered a transfer in a cost-benefit analysis. If the scope of the analysis is geographically restricted (i.e. benefits for Quebec), a transfer can be measured as a benefit. It, however, means that the benefit is very susceptible to the geographical scope of the analysis.

This is particularly problematic for transportation services where benefits (and associated costs) can flow in both directions. In this example, the improved rail service would without doubt increase US tourism in Montreal, but also likely decrease local tourism in Montreal as Quebec resident now decide in greater number to spend their tourism dollars at US destinations. Obtaining accurate estimates of such transfers is difficult and, often, unreliable. Also, promoting benefits essentially based on ‘transfers’ is not always an efficient way to advocate for projects since positive benefits necessarily implies negative benefits for another stakeholder.

Aggregating Benefits

The aggregation of different types of benefits is appropriate only where the rules of a benefit-cost analysis are followed. This ensures that no benefits are double-counted.

The aggregation of benefits requires the transformation of benefits into a common unit of measure, i.e. in dollars. This process is called monetization. Aggregation is also necessary to sum benefits accruing over time. This requires not only an assessment of the durability of the new process/policy/infrastructure, but also a discount rate which reflects the diminishing value of benefits farther into the future. Each of these features is discussed below.^{Footnote 26}

Monetization

In some cases, benefits can easily be expressed in dollar terms, because they are realized in dollar terms. This is, for example, the case for carriers’ cost savings. In other cases, the monetary value of benefits is less clear. For example, what is the monetary value of a minute of time? What is the monetary value of a life or of decreased morbidity?

A significant amount of research exists on the appropriate values to monetize different types of benefits. Academic debates abound on the appropriate approach to measure individual benefits, and a number of methodologies often co-exist. Some are based on observed behaviour, while others are based on surveys.^{Footnote 27} For the most common benefits such as the value of time and the statistical value of a life, regulators conducting frequent benefit-cost analyses (e.g. Treasury Board) provide guidance as to what they consider the most appropriate estimates. It is important to note that this report does not spend a significant amount of time discussing the valuation methodologies and rationale.^{Footnote 28} Instead, it provides guidance as to the most commonly used values in Canada.  It is also important to note that the commonly used “statistical value of a life” is not a valuation of what one individual person is intrinsically worth, but is a simplified unit of measure for the willingness to reduce the chance of death in an entire population of people.

Discount Rate

In order to put all relevant benefits on a common temporal unit, one needs to convert future streams of benefits into a ‘present value’ amount, i.e. the value of these benefits in today’s dollars. Future benefits are discounted using a discount rate, i.e. the rate at which future benefits are deflated to express them in today’s dollars.^{Footnote 29} There are a number of strong empirical rationales for discounting, most notably the cost of capital (i.e. $100 invested today will be worth more in the future, so $100 in the future is worth less in today’s dollars) and the time-preference of individuals, which intrinsically value money received today more than money they get in the future.

Using one rationale or the other to establish a discount rate can lead to widely differing rates. Indeed, the choice of the discount rate can be quite controversial, and rightly so since it can have a significant impact on the valuation of the results. Unlike a financial discount rate, which reflects the opportunity cost of capital, the economic discount rate (or social discount rate) should reflect how society values current costs and benefits versus future ones.

Guidelines by the Treasury Board Secretariat (TBS) recommend using a discount rate of 8%, with proposed sensitivity at 10% and 3% (p. 37).^{Footnote 30} Figure 3 shows the impact of using these discount rates on a stream of benefits of $100 per year.

Image Description

Figure 3: Cumulative Discounted Benefits of $100 per Year

This figure shows the impact of using discounted rates of 10%, 8% and 3% on a stream of benefits of $100 per year over a 60 year time period.

Two particularly salient points should be made. First, when using the 8% of 10% discount rate, benefits accruing after the 30th year are largely insignificant. Indeed, discounted benefits for Year 31 to 60 represent 4.7% of benefits for Year 1 to 30 with a 10% discount rate, and 8.3% for an 8% discount rate. This means that for most long-term policies, choosing a length of application beyond 30 years has little impact on the measurement of benefits.

Second, the impact of the discount rate can be very significant. Indeed, after 60 years, the difference between a 3% and 8% discount rate is a ratio of 2.14, i.e. benefits are estimated to be 2.14 times larger when a 3% discount rate is used. This underlies the significance of the discount rate and, hence, the controversy surrounding it. In a Canadian context, and to ensure consistency with other evaluations, adopting the TBS’s recommendation (8%) is most appropriate.

Using this discount rate, over a 30-year period, means that an annual benefit of $100 would represents a total cumulative benefit of about $1,200. This 1 to 12 ratio is used to provide high-level estimates of benefits where relevant.

Key Challenges

Of course, a number of technical challenges may arise, including ways to treat risk and uncertainty, as well as data limitations. In some cases, benefits may simply be impossible to accurately monetize, and as such may need to remain qualitative. This, however, does not mean they are trivial, and in some cases may be too important to ignore.

In the case of preclearance, it is particularly the case of benefits associated with security. As noted by Anderson (2012) (p.26):

Assessing the costs of extreme events on non-resilient systems is difficult. The cost of losing a bridge for a long time would be huge, probably in the billions, but this must be balanced against the fact that such an event is quite improbable. In theory, an expected cost can be estimated by multiplying the event cost by the probability of the event. But what is the probability of terrorist attack on a particular bridge? We don’t know because we don’t have a history of terrorist attacks on which to base an estimate. In the absence of hard analysis that can be used to weigh costs against benefits, the costs associated with the vulnerabilities of the cross-border infrastructure probably don’t get the emphasis they deserve in policy formulation.

In such cases, these benefits related to preclearance may need to be treated qualitatively. They should not be simply ignored, however, since they likely represent a significant benefit of preclearance.

Measurement Methodologies Identified in the Literature

Key Trends Observed in the Literature

The literature reviewed did provide a number of different approaches to value the benefits of preclearance. A few trends observed in the literature reviewed are worth mentioning.

• First, it is important to note that none of the literature reviewed on the methodologies to measure benefits referred to preclearance directly. Some focused on the truck pre‑inspection pilot currently underway.
• Second, of the literature focusing on measurement, the large majority focused on measuring the ‘cost’ of border issues rather than the benefits of particular programs or processes. Of course, while a delay is measured as a cost, the same methodology can be used to measure the benefits of a reduction in delays.
• Third, most of the literature focused on measurement for freight, which is a relatively minor area of focus for current preclearance activities. As a result, literature focusing on passenger benefits was specifically sought.
• Fourth, while some of the literature focused on measuring individual components or benefits, related frameworks generally provided only ‘headline estimates’ of benefits in the form of a single number. These approaches, while of interest, are less conducive to a discussion about the various benefits of preclearance.

Summary of Literature

Table 7 summarizes the methodologies used in the literature deemed of most relevance to the development of a measurement methodology. The papers reviewed are ordered by date and primary authors. These findings are used to develop the methodologies for individual benefits in the following section, as well as to shape the overall framework in the next chapter.

Proposed Methodologies for Measuring Individual Benefits from Preclearance

Before developing a comprehensive framework for measuring preclearance benefits, it is first essential to better understand how individual benefits can be measured. The relationships between these benefits, and the way they can be estimated, will define how they can be integrated within a more comprehensive framework.

A number of benefits of preclearance were identified. They were divided into five major categories. In this section, for each of these categories, a methodology to measure related benefits is put forward. This will form the basis of the measurement framework, which will integrate all categories of benefits.

For each individual benefit, a methodology is proposed based on the literature review, discussions with stakeholders and an analysis. Potential data sources are identified and a high-level assessment of the magnitude of the benefit is provided. Finally, a brief assessment of the robustness of the analysis is provided.

Optimizing Border Resources

The figure below summarizes the methodology proposed to measure the benefits of preclearance stemming from the optimization of border resources. It also provides a high level assessment of the magnitude of the benefit (Mag.), as well as of the robustness of potential estimates (Rob.). It is important to note that these are purely indicative. Indeed, the magnitude of benefits depends heavily on the particular preclearance operation being analyzed, as well as the scope of the analysis. For each of the individual benefits, a more detailed analysis is provided in the following subsections.

Image Description

Benefits from Optimizing Border Resources

This figure recaps proposed methodology used to measure benefits of preclearance based on the optimization of border resources. It considers the magnitude of benefits as well as the robustness of estimates. Both are dependent on the preclearance operation being analyzed.

Lower Infrastructure Costs

Lower Operational Costs

Reimbursement of Costs (User Fee)

Improving Security

The figure below summarizes a methodology that could measure the benefits of preclearance stemming from improved security. It also provides a high level assessment of the magnitude of the benefit, as well as of the robustness of potential estimates.

Image Description

Benefits from Improving Security

This figure reviews a methodology that could measure the benefits of preclearance from improved security. It considers the magnitude of potential benefits as well as the robustness of estimates.

It does not appear that accurately measuring security benefits associated with preclearance is possible. It requires strong assumptions about the role played by preclearance in preventing catastrophic events, assumptions which have no strong basis on which to be developed. Moreover, these assumptions drive, to a large extent, the final valuation of benefits.

Other significant challenges are related to the development of catastrophic event scenarios, along with the probability for such events. These challenges mean that accurate measurement is nearly impossible. As an order of magnitude, for example, if it were to be assumed that preclearance diminished the potential of one major terrorist attack and one major epidemic in the US by 1/1,000, and that these events were to occur once every 15 years (for discounting purposes), benefits to the US could be roughly be estimated at $100 million.

For each of the individual benefits identified in section 0, a more detailed analysis is provided in the following subsections.

Intercept Aliens in Host Country

Intercept Illegal Goods in Host Country

Reduction in Loss of Life and Morbidity

Reduction in Business Interruption

Reduction in Property Damage

Improved Relations and Information Sharing

Improving the Experience of Crossing the Border for Passengers

The figure below summarizes the methodology proposed to measure the benefits of preclearance for passengers crossing the border. It also provides a high level assessment of the magnitude of the benefit, as well as of the robustness of potential estimates.

It is important to note that these are purely indicative. Indeed, the magnitude of benefits depends heavily on the particular preclearance operation under analysis, as well as the scope of the analysis. For each of the individual benefits, a more detailed analysis is provided in following subsections.

Image Description

Benefits of Improved Experience at the Border for Passengers

This figure summarizes the proposed methodology used to measure benefits of preclearance for passengers crossing the border. Increased benefits are a result of reduced wait times, improved reliability and convenience and choice.

Reduced Wait Time for Preclearance Passengers

Improved Reliability

Increased Convenience

Increased Choice

Improving the Value Proposition of Crossing the Border for Freight Carriers

The figure below summarizes the methodology proposed to measure the benefits of preclearance stemming from the optimization of border resources. It also provides a high level assessment of the magnitude of the benefit, as well as of the robustness of potential estimates.

It is important to note that these are purely indicative. Indeed, the magnitude of benefits depends heavily on the particular preclearance operation under analysis, as well as the scope of the analysis. For each of the individual benefits, a more detailed analysis is provided in the following subsections.

Image Description

Benefits of Improved Experience at the Border for Carriers and Airports

This figure recaps proposed methodology used to measure benefits of preclearance based on optimization of border resources, while considering assessment of the magnitude of the benefit and robustness of potential estimates. In particular, it identifies that passengers facing better choices and service (i.e., faster, more reliable or more convenient) are prepared to increase their spending either through increases in fees or from additional travel.

Operational Costs Savings

Lower Terminal Costs for Airlines

Lower Inventory Costs for Freight

Improved Airport Competitiveness

Increased Revenues Through Improved Service and Increased Ridership

Other Benefits

Image Description

Other Benefits

Using assumption that the net increase of tourism is made possible by preclearance.

Increased Tourism

Increased Spending in Host Country

Increased Foreign Investment and Productivity

Environmental Benefits

Towards a Framework

This report has detailed the proposed methodology to measure the individual benefits that could be attributed to preclearance which were identify. It did not propose, however, a way to aggregate these benefits. This chapter provides some guidance on aggregation, as well as provides some other directions on the application of the measurement methodologies in the different contexts of preclearance and pre-inspection. This guidance is operationalized in an example. Although this example does not provide an accurate or complete measurement of preclearance benefits, as this is clearly outside the scope, more detailed pointers as to how the methodology could be applied is provided.

Key Challenges

Proposing specific methods to measure the benefits of preclearance requires establishing clarity and trading-offs between a number of factors.

• Robustness and Availability: Is the focus on obtaining robust estimates, or should less robust estimates be produced based on available data? At what point should an estimate be excluded / included based on its level of reliability? What level of assumption is acceptable versus a requirement to use observed data?
• Scope: Are benefits measured only for Canada? For both the host and foreign country? Are benefits to international passengers counted?
• Focus: Is the measurement for benefits of existing activities or of proposed activities? Are benefits being measured for a single preclearance location or for all preclearance activities? Are they measured before implementation (i.e. potential benefits) or after implementation?

This chapter provides guidance which should, at least in theory, provide an analyst with sufficient understanding to adapt the methodologies to each of these challenges. Indeed, since the proposed framework is essentially built on individual measurement methodologies, it is very modular. It is of course impossible to provide a complete level of details for all the possible permutations, but the research team believes that sufficient information on the metrics and models has been provided to easily adapt the methodology to these different realities.

The following section provides guidance as to how to adapt each methodology for measuring preclearance benefits based on issues of data, scope and focus. Then, an example of how it could be applied to a specific situation is shown. This example identifies some of the key drivers of benefits which could be used to assess future preclearance projects in the absence or in the case of limited observed and measurable data.

Guidance on the Application of the Methodology

Summary of Benefits and Measurement Recommendations

Table 8 provides a list of the relevant preclearance benefits identified in the report alongside the estimated magnitude and robustness of potential estimates.^{Footnote 35} It also provides some discussion of the impact of scope, data needs, and focus, as well as other relevant notes on the application of the methodology for that benefit.

One thing of particular importance is that it is almost impossible to accurately assess whether benefits accrue mostly to the host or the foreign country. Indeed, while passengers (from either country) may benefit from lower delays or better choices, it is entirely possible that this benefit is then captured by airlines through higher fares. Similarly, while carriers undoubtedly generate significant operational savings, it is unclear to what extent these savings are then transferred to passengers (through lower fares) and authorities (through user fees). Even if it was possible to accurately identify the stakeholder capturing the benefit (e.g. the carrier), questions could be raised since ownership of airlines is not entirely domestic. For example, about 13% of Air Canada is owned by non-Canadians, so benefits flowing to Air Canada could be considered as partially non-domestic.

In the same vein, some of the passengers using preclearance facilities are neither host nor foreign country citizens. These passengers save time, and also benefits from better choices or increased convenience. Given these difficulties, the research team strongly recommend that any framework adopted does not limit the scope of benefits, leaving discussions of the distribution of benefits as a qualitative component of the assessment.

Otherwise, one should also note that while benefits that can be legitimately summed up (i.e. ‘additive’ benefits) should be aggregated, it is recommended that analyses requiring IO or CGE modelling (‘impact analyses’) be conducted separately (and separately from each other) to facilitate the understanding of individual impacts and avoid totals that would include double-counting.

Note: + is low, ++ is medium, +++ is high. The magnitude of a given benefit can vary widely depending on the preclearance facility or operation under study. The assessment provided in the table is purely indicative and should be interpreted with care.

How to Apply to a Passenger Air Preclearance Facility

The proposed framework is modular and could apply to a variety of cases. This section briefly provides an assessment of benefits for the case of a passenger air preclearance facility. The example of Toronto’s Pearson airport is used. Based on this high-level assessment, some of the key drivers of benefits which could be used to evaluate new facilities are identified.

Benefits Assessment

First, it is useful to remind the reader that measuring preclearance benefits was not within the scope of this research report. Nonetheless, where possible, examples of benefits valuation were developed. In Table 9 , these examples applied to Toronto’s Pearson airport preclearance facility are summarized. Unsurprisingly, some items which could be measured do not have estimates given the lack of information currently available to the team.

As shown in Table 9 , based on a heavy set of assumptions which would be verified in any serious measurement endeavour, preclearance benefits at Toronto’s Pearson Airport are estimated to be approximately $47.3 million per year, or nearly $570 million dollars over a thirty year period (discounted at 8% per year). Most of the government-related savings (infrastructure, operational, administrative savings), which accrue to the US, are not counted. All other benefits are shared between Canadian and US carriers and passengers, as well as some international passengers. The separation of these benefits was not assessed.

It is worth noting that the two largest benefits, i.e. increased passengers choices and lower terminal costs for airlines, are specific to the air sector. One would thus expect preclearance benefits to be sizeably smaller for facilities serving other modes.

Other benefits of preclearance at Pearson’s airport which are of importance but are hard to value with significant accuracy include:

• Improved security as illegal passengers can be intercepted before boarding the plane;
• Improved security as illegal goods or pests can be intercepted before being loaded for the US;
• Improved relations and information sharing between Canadian and US border agents, increasing the probability of avoiding potential threats;
• Increased convenience for passengers catching connections in the US as they can fly directly to domestic terminals and connect rapidly to other domestic flights; and
• The value for passengers at major US hubs who benefit from shorter clearance lines and reduced delays.

In addition to these benefits, it is worth mentioning another number of significant impacts that preclearance has on the Canadian economy. Indeed, by saving time and reducing delays for business passengers, the preclearance facility facilitates business travel and increases productivity. This in turn can lead to significant spin-off benefits in terms of increased cross-border trade (in goods and services), improved productivity and competitiveness, and higher economic output. The extent of such benefits, while hard to quantify with certainty, is not negligible.

Moreover, by allowing direct flights between Toronto and US destinations that would otherwise not exists, preclearance favours the development of tourist and business-related events (conventions, conferences, etc.) in Toronto. These events generate significant spin-off benefits in the local economy which would otherwise accrue to other cities.

Thirdly, the preclearing facility puts Pearson on a level-ground with US airports when it comes to transiting passengers to US-bound destinations, since passengers can clear US customs directly in Toronto. This means no double-clearance is required, and provides a clear competitive edge to the airport. This facilitates the development of the airport and ensures additional jobs remain in the local economy.

Finally, a significant number of CBP officers are located in Toronto instead of the US, providing a small boost to the local economy as they live and spend a portion of their wage in Toronto instead of the US.

Key Drivers of Benefits

The example of the air preclearance facility points to some clear drivers of benefits for such operations. Unsurprisingly, the volume of passengers being processed through the preclearance facility is the most obvious. It drives all other benefits, maybe to the exception of infrastructure costs savings.

There are, however, some follow-up questions which are worth asking as they also drive benefits, contingent on passenger volumes. In particular, of the passengers and services provided from the preclearance facility, the following questions provide guidance as to the magnitude of benefits:

• What proportion of passengers will benefit from new direct flight options?;
• Is there a large cost-differential for terminals that will be served from the facility?; and
• Will passengers save a significant amount of time or face much improved reliability when clearing at the facility?

Other benefits (carrier’s operating costs, environmental benefits, administrative costs savings, etc.) are generally small in proportion.

In terms of unquantified benefits and impacts, some of the key questions that must be asked to assess whether the benefits are likely to be sizeable are:

• Is this airport in the host country the origin for a significant numbers of illegal passengers or illicit cargo with a destination in the foreign country?
• Is preclearance opening new niche markets for businesses and tourism in the host country?

Answering these questions, and especially getting a sense of the magnitude to which each objective would be met, can provide a good assessment of whether the new facility would generate significant benefits or not.

A Note on Other Modes

Of course, the relative importance of key drivers for different types of facilities will differ. Indeed, non-airport preclearance operations generally do not generate significant (or any) passenger choice or terminal-related benefits. In that context, focusing on time savings, reliability and carriers’ operational savings should be most appropriate, alongside tourism impacts. In some cases, infrastructure savings may also be most significant (e.g. Buffalo-Fort Erie truck border crossing).

Similarly, security impacts, outside the air mode, are also likely to be much lower given that history suggests that terrorism incidents involving passenger trains, ferries or freight trucks are less likely to generate as significant damage as airplanes.

In any case, the examples and framework provided in this report should provide significant guidance as to the relative importance of different benefits and impacts, and help policymakers assess the benefits of preclearance before or after implementation.

Conclusion and Next Steps

Conclusion

Potential benefits offered by preclearance operations are significant. Of course, they can differ widely based on the mode and the port of entry. In most cases, benefits to passengers and carriers are driven by the potential for faster customs clearance and the associated time saved. In the air sector, however, the additional operational flexibility leads to much larger benefits, both to passengers (increased choices) and airlines (terminal fees). The extent to which airlines are able to collect these benefits through higher fares (i.e. how the benefit is divided between passengers and airlines) is hard to establish.

In the trucking sector, the benefits associated with lower inventory carrying costs accruing to shippers are potentially significant. This benefit is contingent on saving time at the border.

In some cases, the benefits from lower infrastructure or operational costs could be particularly interesting for border agencies. Similarly, while too hard to accurately value, security benefits are potentially significant.

Finally, one can note that other benefits, largely driven by the primary benefits noted above, can be measured using economic modelling. These models rely on a heavy set of assumptions and can be perceived as not being particularly transparent. On the upside, they do capture a number of impacts which are otherwise practically impossible to capture directly, including the potential for improved productivity and improved competitiveness.

Appendix A: Literature Identified

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Appendix B: Stakeholders Consulted

The following stakeholders were successfully consulted for this study. The research team did reach out to a number of other stakeholders, but interviews could not be arranged within an appropriate timeframe.