Mail reform: ‘Onerous universal-service obligations should be reduced’

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While the goal of liberalising the postal sector is more or less broadly backed, divisions remain as to the ‘when’ and the ‘how’, says Professor Paul R. Kleindorfer, an expert on postal liberalisation, in an interview with EURACTIV.

Professor Paul R. Kleindorfer participated in the 
PriceWaterhouseCoopers study
on ‘the impact on universal service of the full market accomplishment of the postal internal market in 2009’, commissioned by the European Commission. He shares his views on these questions with EURACTIV.

Do you believe 2009 should be the target date for all member states to complete liberalisation or do you believe that some countries should be able to allow their national operators more time to adapt? 

Some will definitely need additional time. My suggestion would be to make this time available to those countries that need it – for example those that lack an independent regulatory authority or whose national postal operators are still under ministerial or parliamentary control. 

But this extension must be conditional on a number of constraints on achieving necessary preliminaries for full market opening and on specifics of what would have to be accomplished in, let us say, a three year additional transition period. 

Which countries might fulfil such criteria? 

Well, mostly the new member states…According to the PwC study that I participated in, the states that are in significant difficulty include Latvia, Lithuania, Poland, the Czech Republic, the Slovak Republic, Romania, Bulgaria, Malta and Cyprus. 

But I would add to those states, although they’re not quite in the same situation, some of the more beleaguered states in the EU, including Luxembourg, Italy, Slovenia, Hungary and Greece, because, although they’re not in terrible shape and are more or less ready for market opening, they have specific problems. 

Greece for example has all its outlying islands and it also has some problems with respect to the independence of its public operator (PO) from its regulator. 

Luxembourg has a problem because it has got major EU organisations in its midst, like the European Central Bank offices. Although this is sometimes an advantage, when there are only a small number of customers, it makes it rather easy for new competitors to cherry-pick the major customers, leaving just the small ones to the incumbent. So it is important for it to have a little time to establish a new working relationship with regards to outbound or international mail from those major clients. 

So, as I said, there are a variety of challenges faced – mostly by the new member states – but, potentially, even some of the old member states could petition to have additional time. And I’m not trying to prejudge whether that petition would be convincing or not, I’m just saying that member states should be allowed to make such a petition and to specify what they would accomplish if they were, for example, allowed another three years with a reserved area of 50 grammes. 

What about France, which is leading the calls for a longer transition period? 

Oh, I think France is ready, more or less. It’s got a very independent regulator, which is very competent and understands exactly what is going on. It’s got a very competent group of senior managers who all know what’s going on. It’s got all sorts of new programmes with respect to raising profits through scope economies on its network. 

Generally speaking this is an enterprise that is ready to go and, given all the pluses it’s got going for it, I would say that the PO in France – where I live – is well-prepared and already well on its way to becoming a very lean, commercially-orientated enterprise. 

The problem for La Poste is that it has a reasonably onerous Universal Service Obligation (USO) – not in terms of delivery frequency but in terms of the density of counter services and citizen access to the network. I wouldn’t go so far as to say that these obligations are a noose around the neck for La Poste, but they are a burden and that burden has been imposed by the French government. If the government chooses to maintain such a costly USO, the least it should do is to pay for it in a transparent manner. 

I’m sure that La Poste would say that, if the Commission can ensure that there will be reasonable and transparent funding of the French USO and that somebody is going to pay for it – other than La Poste in the middle of a competitive battle – then fine. 

But in the meantime, countries like France, Italy and a lot of the new member states think that pushing ahead with liberalisation without first clarifying the issue of who will pay for the USO is ill-defined and they are unlikely to simply lie down and agree to take on the cost of these public missions themselves. 

So you’re saying it is not viable for incumbents bear the responsibility of the USO alone? 

Well, no, it could be… The current universal service providers in every country in Europe have market power and, if they get their act together, then there is no reason why they should not have full responsibility, at least in the beginning, for the USO. 

But I do think that some things should be paid by the state – against clear accounting and pre-agreement on their exact cost and value. For example, when public missions, such as mail for the blind, or some social expenditures, such as free social security mailing from the government, are imposed on the PO, someone needs to pay for them. 

Currently these public missions are funded by maintaining a ‘reserved area’ for incumbent operators. Can you tell us a bit more about the advantages and disadvantages of this system? 

The advantage is: it works. Despite the fact that different countries have had very different USOs, this system has worked for all of them. 

The disadvantage is: it only allows competition upstream. The consequence of that is a total lack of pressure on postal incumbents to innovate and be productive. 

In addition, the gap between the advantage and disadvantage is widening, because the net benefits of competition are increasing. We have now moved towards an internet-enabled economy and, from electronic substitution of mail to e-commerce, there is a huge maelstrom of economic activity and change. 

So we can’t stay attached to an 1840 vision of what is now just one element of the communications market. There is now much more inter-dependency across communications services and the fate of the postal sector depends on its ability to integrate and be efficient in this much broader, much more dynamic communications market. 

Do you think new funding mechanisms should be set up to finance the USO? 

The PwC study indicated four possibilities for funding – although they are not necessarily new mechanisms. 

The first would be to leverage on existing economies of scale and scope in the postal network itself. Economies of scope mean you’re using the same network to offer a larger number of products – which some postal operators are starting to do – be it offering financial services or more convenient parcel delivery and notification. 

The second is increased commercialisation – restructuring the postal operator into a more efficient and market-oriented organisation. 

The third way would be to restructure the USO itself and adapt it to the market. In some instances, this could mean reducing the USO. 

Having counter services all across the country, so that nobody is further away from a postal counter than they are from their local tavern and requiring that each one of those counters provide every single service that the postal sector offers – from identity determination to insurance, even if those services are only demanded once every two years – that’s a pretty onerous USO. One should quite properly think of reducing it because its value is not in line with its cost. 

This goes for all services that are already provided at an acceptable level through the marketplace. They should not be imposed as part of the USO.

The fourth option would be the subsidy route. 

Is this route acceptable in your view? 

As I said, some things, such as mail for the blind, should be paid by the state. However, you do need to be very, very clear about the actual cost of these missions and the rationale for them. 

Traditionally, the reserved area absorbed all sins, but now we have to be clearer, ex ante, about what services should be covered by market power and economies of scale or scope of the PO, and what should be covered from other sources, such as state subsidies. 

There needs to be a clear and transparent discussion about what the various elements of the USO are and which of these elements are burdensome and would not be covered if you just left it to the post office to do it on its own. 

What has to be avoided is a murky discussion where operators say ‘we want subsidies and we’re going to tell you after the fact whether we need more’. Instead, we need a transparent debate that identifies the public missions imposed on the PO and their cost, and then, on that basis, the nature of the subsidies from the state. 

Otherwise, we’ll have state aid cases all over the place because there will always be the suspicion that you’re really subsidising competitive services. 

Another option that is also sometimes discussed would be to make the universal service obligation mandatory for all operators. What do you think of this? 

Services that are already provided at an acceptable level through the marketplace should not be imposed on anyone, I firmly believe in that. Why should you impose a universal service obligation on some operator – whether it’s an entrant or an incumbent – on say newspaper deliveries if you’ve already got a very able newspaper delivery system in place? 

The same goes for financial services. Some countries still impose that every single counter should offer a full range of financial services. But this is generally-speaking a very competitive sector and there’s no reason to impose anything like that as an obligation on an incumbent postal operator. 

And then, look at Finland. You cannot enter the market there unless you agree to provide delivery to every address in the country. The problem with that is that you’re never going to get anybody to enter. In fact, in Finland, nobody came to the party. So it’s definitely not a good idea. 

And the idea of a ‘competitor-pays’ system is often put forward by the so-called ‘Southern group’ of postal operators as a potential substitute for the reserved area. Could this work and how? 

Compensation funds have not worked well in various other industries (e.g., telecom). The reasons for this are that they subdue competition and that there are large transactions costs in collecting the funds. Even if they didn’t subdue competition, it is anyhow hugely difficult to administer such a fund fairly, responsibly and efficiently. But there are other problems as well, such as the stability of the fund: how are you going to estimate how large it should be and who is going to make up the difference if the USO costs more than what is in the fund? Do you adjust the tax rate ex-post? What a mess! So, I don’t much care for any of these “tax competitor” schemes. They didn’t work in electric power or in telecoms. I don’t see them as anything but a very thin reed on which to base public policy. 

Access pricing policies, on the other hand, could and should bear a reasonable portion of network costs. They stimulate new demand, they do not stifle competition and they can be used to provide much more stable sources of income for the incumbent for its USO. That’s a much smarter approach to the matter than this very murky approach of trying to collect money from unwilling competitors. 

However I do think that, in the end, different solutions will be required for different countries, seeing as they all have different ideas of the public missions they want to impose and the level of the USO they want to have available. Also, some governments will be prepared to protect their incumbents for longer. This is a problem, but not a big one if the public missions imposed are clearly identified ex ante. 

So, there will be a delicate balancing act between all these options, with the incumbent PO continuing to play a critical role in financing the USO, while achieving some of the benefits of competition. 

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