 | Around the World in 80 Ideas |
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PUBLIC SERVICES 16: Liberating the letter Privatization of postal services The problem: boxed-in Originally, postal services were always state-owned monopolies. This enabled governments to maintain a vigilant eye on seditious correspondence. More recently, state-run post offices have been accused of channelling revenues from their letter monopoly to cross-subsidize other services (notably parcels) in an unfair fashion. Some of these incumbents have been slow to adopt new technologies, and have been plagued by strikes, inefficiency, and high costs. And in today's world of cross-border communication, people have begun to question whether small, geographically-bound post offices really make sense. The idea: liberalize and privatize Several countries have now liberalized the monopoly privileges held by state-owned post offices and opened up the market to free competition - following the strategy which has already worked so successfully in the telecommunications sector. Examples: delivering competition In 1991, Finland was the first country to liberalize its postal service - up to a point. Finland Post operates as a limited liability company, but one still owned by the government. No competitors have yet entered the market: not surprising, given that they would be required to pay a levy of up to 20% on their revenues, designed to prevent them 'cream skimming' by concentrating on the most profitable services. Privatization is not inconsistent with the provision of a universal service. In 1994, PTT Post was privatized in the Netherlands, merging in 1996 with TNT, the private courier service that originated in Australia.. PTT Post retains its monopoly of mail delivery, collection from road-side boxes, and sale of postage stamps for letters weighing up to 350g. But in return, it must carry addressed items up to 10kg at uniform rates and under the same terms and conditions for all customers. Access to the Dutch Post Office's network is provided on a commercial basis. Customers as well as rivals receive a discount based on avoided costs when they deliver their mail at the sorting centre. In Germany, Deutsche Post is now a company operating under licence. Twenty-nine percent of its shares were sold to the public in 2000, in an offer that was eight times oversubscribed. Sixty percent of the company's employees bought shares. It still retains a de facto monopoly of letters: competition is permitted for direct mail items over 50g, but so far this has had no significant impact on opening the market to competition. The mere threat of competition, though, has improved its productivity, with Deutsche Post improving productivity, providing its customers a better service, and refurbishing retail premises. Productivity has soared. In 1999 the newly-liberalized company bought seven postal businesses world-wide, and founded eVita, a web-based virtual shopping mart, took a share in a German e-commerce company, developed a digital signature service for internet transactions, took a share in the United States computer-franking company E-Stamp, and the US's largest airfreight carrier. By the time of the floatation, the proportion of revenues derived from activities other than the traditional mail business had risen from 30% in 1998 to 65% in the first half of 2000. Critics of Deutsche Post argue that such acquisitions were subsidized from the profits of the letter monopoly. A case bought by UPS in 1994, originally charging that Deutsche Post was cross-subsidising its parcel services, was finally settled by the European Court of Justice in March 2001 with a modest fine of £15 million, which related only to illegal loyalty rebates. But Deutsche Post continues to be scrutinized by the competition directorate of the European Commission. The postal market in Sweden was fully liberalized in 1994, with the enthusiastic support of the Swedish post office, Posten. The responsibility for guaranteeing a uniform service rests with the government, not Posten: companies can compete to win the contract to provide this service. At present, it is delivered by Sweden Post, which remains government-owned. However, there are signs that local competition is having its effect: the incumbent has sought to offer cost-based discounted local carriage rates in areas where competition is working. In New Zealand, the letter monopoly was abolished in 1998, again with full support from the New Zealand Post Office. Third parties are allowed to access the delivery network. As in Sweden, however, this enterprise remains wholly owned by the New Zealand government. NZ Post faces several entrants to its markets, continues to fulfil its universal service obligation apparently without difficulty; it managed to lower the price of a standard letter by five cents in 1995 and has kept the price unchanged (at 40 cents) since then. In response to having competing letterboxes on the streets, NZ Post has set itself a goal to become a leading e-business at home and to develop new business abroad: for example it has won contracts to manage or assist the postal systems of South Africa and of Trinidad and Tobago. In Spain the state-owned postal service, Correos y Telegrafos, has been in competition with private-sector rivals since 1960, and by the late 1980s, private-sector firms were winning a much larger market share. Direct mail is now liberalized, but not inter-city or cross-border mail (though in practice, outgoing cross-border mail is liberalized. In the United Kingdom, the need to move towards liberalization has been accepted, but progress is more modest. Under the Postal Services Act 2000, the Postal Services Commission (Postcomm) has been given powers to introduce competing postal services, though it must ensure the continuation of a universal postal service consisting of at least one collection and one delivery of letters every working day throughout the land. For political reasons the present and the previous governments have favoured a uniform tariff, though for years, big mailers have in practice received large discounts for pre-sorting and other forms of work-sharing. On 28 March 2001 Postcomm awarded Consignia, the re-named UK Post Office group, a licence to deliver letters. Hays DX and TNT also have licences, and other applications are being reviewed. At present, Consignia remains by far the dominant letters carrier, though this might change as a result of a February 2002 ruling to open up business mail to further competition immediately, and domestic mail shortly afterwards. While doggedly defending its letters monopoly at home, Consignia has been active in boosting competition abroad. In 1999 it bought six document and parcel businesses in the United States, Germany, France, Denmark, the Netherlands, and Ireland. In Sweden it has bought a significant share in City Post, the main competitor to the incumbent Posten. More generally in the European Union, the European Commission issued a directive in 1997 limiting state monopolies to letters less than 350 grams. Direct and international mail and all letters weighing more than 100g will be open to full competition within the EU as from 2003 (the responsible European Commissioner, Frits Bolkestein, argued to set it at only 50g). Assessment: stamp of success The link between postal services and national border is breaking down as demand rises for regional and global delivery services. As demonstrated in the Netherlands, government can set price and service standards and transfer responsibility for the provision of competitive postal services to the private sector. The cost of maintaining the universal service obligation - the requirement to deliver to every address in the country at a uniform price - is probably over-estimated. New Zealand Post had no difficulty in maintaining such a service despite liberalization and a cut in the price of a stamp. But even if the obligation is regarded as a problem, the benefits of competition can still be introduced: simply, government accepts the burden of guaranteeing the service, and asks private companies to compete to provide it, perhaps on a least-subsidy basis. Transition to a fully competitive postal market may entail pain before gain. Both Sweden's Posten and NZ Post experienced a sharp drop in profits following the removal of their letter monopolies. Posten's profits peaked in 1997-98 only to fall dramatically towards the end of 1999. In NZ Post's case, there have been no losses and over the past three years profits have increased (though not to the level of the monopoly era). The number of full-time-equivalent (FTE) employees at Posten fell just under 10% in four years, from 46,000 in 1995 to 42,000 in 1999. In Deutsche Post, although other carriers have not yet been licensed within the letter monopoly, the number of staff has been reduced rather more, from 380,000 in 1990 to 240,000 in 1999, though all by natural wastage or agreed redundancies and without industrial action. It seems certain that staff reductions will be needed in Consignia, though additional jobs will be created in new entrants from the private sector. For further information:
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Copyright 2002: Adam Smith Institute
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