Financing Universal Service for mail delivery

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With full postal-market liberalisation due in 2011, the Commission wants to guarantee that European citizens continue to enjoy the right to a full universal service. A variety of financial-support mechanisms have been suggested, but many fear that none will appropriately ensure the same level of service as the current monopoly system.

Background

Providing equal access to basic utilities such as water, electricity, telephony and mail has traditionally been a task for public authorities. Without their intervention, firms would most likely concentrate on serving low-cost customers while other users would find themselves excluded or would face much higher tariffs in accessing these services. 

In order to avoid such a situation, regulators established a 'Universal Service Obligation' (USO), based on the twin notions of uniform price and ubiquitous service provision, for providers of such services. 

This type of USO has been an integral feature of postal services for decades, with European law requiring member states to ensure that all citizens, wherever they live, have their mail collected and delivered, at affordable prices, at least once a day, five days a week. 

Financing the USO was not a particular problem in the past as monopolies could offset the losses made on serving customers in high-cost areas – such as remote rural zones – with profits made by over-pricing consumers in low-cost areas – such as dense urban zones. 

However, the past two decades have witnessed large-scale deregulation of sectors previously operated by public monopolies, such as telecommunications, transportation, electricity or gas. The opening of these markets to competition has left the door open to new entrants, able to cherry-pick the most profitable segments of the markets, making it more difficult for historic operators to finance their public policy obligations. 

In the postal sector, despite the gradual market opening over the past decade (see Postal reform LinksDossier), national Universal Service Providers (USP) were given the possibility to ensure continued financing for the USO through the creation of a legally-protected monopoly over particular services or products – known as the 'reserved area'. 

However, the number of these products and services has gradually been shaved down – first to include only letters and parcels weighing under 350 grammes (First Postal Directive, 1997) and then to cover only letters of less than 50 grammes (Second Postal Directive, 2002). And, following the adoption, early 2008, of a Third Postal Directive, a fully open postal market – with no more reserved area – should be in place by 2011 (or 2013 for certain exempted countries).

Maintaining the postal USO in a fully competitive market raises two questions. Who should provide these services and who should pay for them? 

Issues

Although the reserved area has successfully provided a simple and stable source of funding for the postal USO in a large number of countries – regardless of their geographical, demographic and economic characteristics – the fact that it works by preserving a monopoly means there is a risk of missing out on some of the benefits of competition, such as efficiency improvements and innovative solutions by new entrants. 

On the other hand, the abolition of the reserved area could have significant financial implications for the Universal Service Provider (USP), as competitors will be able to cream-skim the most profitable market areas without having to carry the burden of the USO. 

Many operators insist that maintaining an equivalent USO without new funding mechanisms would not be financially viable. They point to countries that have already liberalised and where incumbent operators have had to finance the USO on their own, saying they have been forced to scale down access to services (Sweden) or to compromise their financial equilibrium (UK). 

However, others retort that incumbents can cover the cost of the USO relatively easily, by increasing the single-piece price of mail delivery, by restructuring to become more commercially oriented, or by taking advantage of economies of scale and scope in the network (ie using the same network to offer a larger number of more competitive products, such as financial services, etc). 

While some had argued in favour of scaling down the USO to make it less onerous, (for example, by confining daily-delivery obligations to single letter mail only or by reducing the range of services offered at counters), the final draft of the Third Postal Directive rejects this idea and "fully confirms the existing universal service".

Instead, it identifies a number of flanking measures that countries may adopt in order to ensure that the provision of universal service remains financially viable in a competitive market, including:

  • Public compensation: through direct state subsidies or, indirectly, through the use of public procurement procedures. Historical operators are wary of the state-aid option because, in the long term, national budgets are always under pressure. Furthermore, there is a concern that it could lead to a multiplication of state-aid cases against USPs based on the suspicion that they are cross-subsidising competitive services with money intended for public missions. 
  • Access pricing: Introduction of a fee that entrants must pay to the incumbent in return for using its network. Alternatively, entrants could decide to provide an end-to-end service (including collecting, sorting, transport and delivery). 
  • Compensation fund: The burden of the USO is funded through taxes imposed on postal operators or directly on consumers. The tax can be applied to revenues, profits or could be a fixed amount. Compensation funds have been used to finance the USO burden in the telecoms and electricity sectors but experience with the compensation fund as a mechanism for financing universal postal service is limited. 
  • Pay-or-play: Entrants may choose to deliver only in low-cost areas and pay into a form of compensation fund or, they can decide to 'play' in the high-cost area (provision of USO) and not to pay the tax. Two varieties of this scheme exist: a 'discrete' version, in which if entrants decide to play, they must play entirely (ie deliver mail to every area in the country) and a 'continuous' version, where the extent to which an entrant decides to play determines the extent to which it is required to pay into the fund. In comparison with the compensation fund, this scheme thus makes competition for 'high-cost' customers more interesting for market entrants. 

No single solution has been imposed as each mechanism presents different advantages and disadvantages in terms of efficiency, ensuring fair competition, welfare gains, transparency and practicability. Also, differing public policy goals and regional characteristics makes a one-size-fits-all approach unfeasible. 

The main problem related to these mechanisms is however the difficulty to calculate the exact cost of the USO, triggering concerns that postal operators could exaggerate the burden in order to claim additional assistance. 

MEPs had demanded that the Commission issue detailed guidance on a harmonised calculation method before the Directive's entry into force, in order to ensure a level playing field among operators and avoid violations of competition law (EURACTIV 14/11/07).

But the final version of the directive only requires that the Commission "provide assistance to the member states on the different aspects of the implementation of this Directive, including on the calculation of any net cost", leaving it up to the EU's competition authorities to resolve any future conflicts.

Positions

EU Internal Market Commissioner Charlie McCreevy said that, although the financing issue is important, there is a “temptation to over-emphasise it”, adding: "Many of us tend also to forget that the universal service may in several respects be judged more an asset than a burden." He said the new Directive would give member states "the broadest possible flexibility to share out any unfair burden or organise compensation mechanisms", but warned: "We must guard against the application and accumulation of disproportionate safeguards that simply substitute one form of a monopoly for another." 

The President of France's La Poste, Jean-Paul Bailly, insists that the universal service must be "correctly" financed if the current monopoly is to be abolished. Among the Commission's proposed funding options, he believes that state subsidies, taxes and compensation funds are inappropriate. "The first option suffers from budgetary weakness, the second would increase the burden for consumers and the third would mainly be filled by the historical operator. As for saying that we have to finance the universal service through productivity efforts, this is out of the question!"

Rather, Bailly favours a 'pay or play' mechanism where new market entrants would either have to take on a share of public-service missions proportional to their financing capacity and their size, or contribute to a fund. 

According to a study commissioned in 2006 by 9 universal service operators to the independent consultancy Oxera, none of the financing possibilities proposed by the Commission is fully satisfactory, in particular, as regards financial security and social equity. On the other hand, it finds that the reserved area provides a stable financial source, making it less likely that the ongoing provision of the universal service be put at risk. 

Derek Holt, author of the study, explained to EURACTIV: "There is a key trade-off being practicality and simplicity versus pure economic efficiency…For some member states, the most important consideration might be focusing on stimulating more innovation and efficiency...Whereas in others, the importance of preserving a universal service and avoiding a complicated financing mechanism might be the most important criteria – in which case, they are more likely to want to preserve their existing approach." (For full interview, click here

According to Dr. Hans-Dieter Petram, member of Deutsche Post World Net's board of management, "market forces will perfectly replace universal service regulation and will most probably do a better job" for the 85 % of standard mail from business customers. Thus, he believes that the universal service should be confined to ensuring the provision of services to residential and smaller business users and that "reliable" financing mechanisms, which "have already been successfully employed in postal or electronic communications and elsewhere", are already at hand if needed. "I emphasise 'if needed'; because if we look at Sweden, we find that universal service has been provided without any subsidies for more than ten years now." 

Among these mechanisms, he sees public funds as the preferable solution, "in virtue of the principle 'who orders, pays'", but stresses that they must be paid in a transparent, objective and non-discriminatory way. However, in view of the limited availability of public resources or budgetary restrictions in certain member states, he adds that compensation funds provide a good alternative "by sharing net costs proportionally among the service providers active in the relevant market". 

Nigel Stapleton, chairman of UK mail regulator Postcomm rebutted the suggestion that competition and regulation were threatening the universal service in the UK. "Competition is already benefiting large mailers through better services and competitive prices, and retail mail users through significant improvements in Royal Mail’s quality of service. The Universal Service remains secure and despite some recent weakness in Royal Mail’s revenues, the company continues to make a profit from providing it," he stressed, adding that the decline in Royal Mail's profits is not due to competition from other postal operators but due to Royal Mail's "inability to control its costs and its need to finance the growing pension fund deficit". 

In a report published in March 2007, the Swedish Post and Telecom Agency concluded that "there is nothing in the Swedish experience that may indicate that competition in the entire postal market should be regarded as a problem". The Agency criticises the "old but erroneous argument" that monopoly gains are needed to finance the universal service, saying that Sweden has survived perfectly well without any reserved areas whatsoever. "Swedish legislation is founded on the notion that the universal service can be provided on a strictly commercial basis, which has proved to be correct," it states. 

The report underlines the need to take into account the benefits of universal delivery for the USP, saying that the possession of nation-wide collection and distribution systems and the ability to provide customers with a one-stop-shop for all kind of postal services must be considered a considerable asset. "The USP, being the only operator capable of offering this kind of complete services, had a great competitive advantage in this respect." 

UNI Postal, which represents trade unions in the postal sector insists that a reserved area is the only financing mechanism proven to guarantee universal services throughout the EU, and calls for it to be maintained until a satisfactory alternative is ensured. It asks the Commission to carry out a new study and develop concrete proposals on how the universal service is to be financed in each of the 27 member states by 31 December 2009. 

While SocialistLiberal (ALDE) and Centre-right (EPP-ED) MEPs have given their backing to a report that agrees to the elimination of reserved areas, the Greens-EFA group in Parliament stresses that countries should have the right to maintain a reserved area, because even the Commission-funded study failed to bring any certainty concerning the financing of universal service and admits that some member states will have to reduce the level of universal service in order to preserve the financial equilibrium. The objective of the Postal Directives is not to open the market but to guarantee a high-quality universal service, they stress, adding: "It is not acceptable to invoke difficulties in using the particular financing means suggested by the Commission as a pretext to reduce the level of universal service in member states." They say member states that have already opened up should be encouraged to put in place either a 'pay or play' system or public-procurement procedures, and that subventions or compensation funds are not adequate as they could encourage the subsidisation of activities that are at least partly rentable or force consumers to bear the costs. 

The European Postal Users Group (PUG), which represents related companies such as publishers, distance sellers, advertisers, envelope manufacturers and paper producers, stresses that an excessive USO encourages the cross-subsidisation of unprofitable services, thereby increasing the burden for postal customers. It states: "A competitive market will require a more flexible definition of the USO…The USO should evolve to guarantee just the core need for sustaining reliable, predictable and sustainable final and universal delivery networks for letter post. This will enable complete market liberalisation, the entry of new players into the market, and the provision of meaningful choice to users through effective competition in practice." 

The Free & Fair Post Initiative (FFPI), which represents users and competitors of the public postal operators agrees: "In light of the on-going transformation of the postal sector, the current definition of the Universal Service Obligation is no longer appropriate for the development of the market…It should be redefined in terms of the minimum level of service that is to be guaranteed to consumers." It adds: "The necessity of maintaining a reserved area to finance the USO has not been proven; moreover it has often been used as an excuse to protect the USP monopolies." 

Timeline

  • 27 Feb . 2008: The third Postal Directive was published in the EU's Official Journal.
  • 31 Dec. 2010:  Deadline for member states to abolish existing legal monopolies on postal services (31 Dec. 2012 for nine member states that joined the EU after 2004, as well as Greece and Luxembourg). 

 

Further Reading

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