The Postal Services Bill: Competition is Coming (web publication)
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A Sceptical Look at the Economics of Skill Provision in the UK
In the late years of John Major’s administration Michael Heseltine failed to privatise the Post Office owing to the government’s wafer thin majority, combined with effective lobbying of MPs by the Communications Workers Union who said that privatisation would result in the wholesale closure of rural sub post offices. So now it falls to Tony Blair’s government to pick up from where the Conservatives left off.
The EC’s postal Directive
As well as paving the way for turning the Post Office into a company, the Postal Services Bill has a second function. It is intended to incorporate, belatedly, the terms of the EC’s Directive 97/67 of 15 December 1997 “on the common rules for the development of the internal market of Community postal services and the improvement of quality of service”. This it partially does, but without following the Directive at all closely. Indeed much of the 78 page Bill seems otiose compared with the 12 page Directive.
What does the Bill set out to do? First and foremost, it creates a postal regulator, the Postal Services Commission, the postal equivalent of Ofwat, Ofgas and the other utility regulators, but with the difference that there will be a chairman and at least three other commissioners rather than a single regulator. In addition the Bill changes the title of the long established Post Office Users’ National Council to that of The Consumer Council for Postal Services.
The division of responsibility between the two bodies appears to be that the Commission defines the structure of the new competitive postal environment, for example by the licences it awards, while the Council monitors how well the system works in practice from consumers’ point of view, and is the conduit for complaints. That said, given that both bodies have a statutory mandate to look after consumers’ interests, it is unclear why two separate bodies are needed. Both are funded by the Exchequer.
The Commission’s licences
A key sentence in the Bill is found in section 5: “Â…the Commission shall exercise its functions in the manner which it considers is best calculated to further the interests of users of postal services, wherever appropriate by promoting effective competition between postal operators”. (Emphasis added). This will occur when the Commission awards licences for operators to offer services that at present fall within the Post Office’s letter monopoly, which for the present stays at up to Â£1 or 350 grams. This provision reflects the Directive’s aim of ensuring the gradual and controlled liberalisation of EU postal markets.
In some other ways, however, the Bill waters down the Directive. For example, the Directive requires that “The universal service providers shall keep separate accounts within their internal accounting systems at least for each of the services within the reserved sector on the one hand and the non-reserved services on the other”. The aim of this requirement is to prevent cross-subsidies from the monopoly services to those that compete with the private sector, thereby distorting the market. For example, in the UK the profitable letter service monopoly has been used for several decades to make good the recurrent losses on Post Office parcels that compete with the private sector. In 1999 Parcelforce’s loss on ordinary activities before taxation was Â£25m, up from Â£14m in 1998. The Bill, however, makes no reference to transparent accounting, nor to having separate accounts for services that are part of the monopoly and those that compete with other suppliers.
Defining a “letter”?
In Article 2 the Directive, provides definitions of the main terms it uses including “postal item”, “item of correspondence” and “direct mail”. The Bill defines a “postal packet” as a letter, parcel, packet or other article transmissible by post. A “letter” is further defined as any communication in written form on any kind of physical medium to be conveyed and delivered to the address indicated by the sender on the item itself or on its wrapping (excluding any book, catalogue, newspaper or periodical).
The restrictions that prevent other carriers entering the market for “letters” are defined in sections 6 and 7. The exemptions to the letter monopoly are listed and include, for example, pools coupons, document exchanges and delivery of Christmas cards by charities. There is just one major document exchange service in the UK, pools are on the wane since the advent of the National Lottery, and delivery of Christmas cards by charities is clearly a specialised activity, so any concessions here are more apparent than real.
More importantly, in a number of EU countries there is no postal monopoly of direct mail, and this segment of the postal market is one that the European Commission may wish to see liberalised elsewhere in the EU. Naturally the Post Office will fight tooth and nail to prevent direct mail being liberalised not least because it is growing more rapidly than first class mail. The fact that direct mail is not defined in the Bill is defendable in economic terms – Royal Mail is paid to carry items and not to examine their contents – but since this segment of the market is undefined, it may make it difficult for the Commission to liberalise it.
The universal service obligation
In section 4 the Bill defines the universal service as at least one collection and delivery of “relevant postal packets” every working day and the provision of a registered post service. The public tariff must be uniform and “affordable”. The uniform tariff, however, does not exclude the Post Office from “the conclusion with customers of individual agreements as to prices”.
The latter phrase will enable the Post Office to continue to give substantial discounts to mailers for volume and, more importantly, for pre-sorting. At present these discounts are published. However, while the Directive requires that the tariff for services that are part of the universal service obligation be geared to costs, the Bill omits this stipulation. It seems, then, that the wording of the Bill would allow the Post Office to bargain with individual mailers behind closed doors. This ought not to be the Bill’s intention since Royal Mail will remain the dominant supplier for some years to come even if the Commission grants licences to competing suppliers.
Perhaps the major flaw in the Bill is the lack of reference to the burden of providing services at a uniform tariff to, say, the Highlands and Islands. For years, this obligation has been the Post Office’s standard argument for opposing any reduction in its monopoly of the letter. What is clear from the substantial profits that the letter monopoly has generated over recent years is that the USO burden was one that the Post Office has absorbed without difficulty and still made recent annual contributions of about Â£300m to Treasury coffers.
In 1998 NERA was asked by the European Commission to quantify the USO burden for all 15 member states. Our estimate for the British Post Office was in the range Â£14m and Â£220m depending on whether we used the net avoidable costs or fully distributed cost method. In 1997 the Post Office’s profits before tax and the Treasury’s levy were Â£577m. On these figures a reduction in the Post Office’s letter monopoly area could be made. This could bring new competitors into the market without endangering the Post Office’s ability to absorb the USO burden and still make a healthy profit.
The Bill includes a new, social twist to the Commission’s duties in regulating postal services. It “shall have regard to the interests of –
individuals who are disabled or chronically sick,
individuals of pensionable age,
individuals with low incomes, and
individuals residing in rural areas.”
This requirement is in addition to the provision of free services for the blind and partially sighted. It will be interesting to see how the Commission implements this clause in practice. If it is widely applied, it will add new burdens to that of the USO and these will need to be quantified and possibly reimbursed from public funds if the Post Office company faces significant competition from new licensees.
The counters network
Other parts of the Bill are long where they should be short, and short where they should be more detailed. For example, sections 14 – 28 of the Bill give extensive details of how to punish those who transgress the letter monopoly. On the far more pertinent issue of whether or how the nation-wide network of counters should be preserved, there is one short section (number 31) which states: “The Commission shall provide advice and information to the Secretary of State aboutÂ…the number and location of public post offices Â…and the Commission shall consult the Council before providing any advice or information under this section.” It is quite unclear whether the buck stops with the Post Office, the Commission or the Secretary of State. Sir Humphrey would relish this obfuscation.
Overall, the Postal Services Bill represents one major advance that is embodied in just seven words among the Bill’s 78 pages. It requires the Commission to further the interests of users of postal services “by promoting effective competition between postal operators.” The Commission’s performance in this respect will turn on what licences it awards and on the conditions attached. It now remains to be seen whether the Commission has been given enough muscle to open up the market for postal services generally, and letters in particular, while still ensuring provision of the universal service.
Ian Senior is a special adviser in the London office of NERA. The views expressed are his own. He has been an economic consultant for thirty years and since 1970 he has been the author of a number of monographs and articles about postal services which have been published by the Institute for Economic Affairs and The Wall St Journal among others. His most recent monograph was published by the Adam Smith Institute in 1996. He speaks at postal conferences and broadcasts on postal matters. With NERA he was part of the team that reported to the Australian National Competition Council on future technological developments in the Australian letter market, and he was a key member of the team that reported to the European Commission on the nature and cost of postal USOs in the European Union.