Privatize Canada Post

The non-partisan (nudge,nudge, wink, wink) C.D. Howe Institute has come up with a report–pdf– calling for the privatization of Canada Post.

It is well worth the 22 pages of quick reading.

I’ll touch on a few of the gems to be found.

At least three main changes can be identified. First, developments such as e-mail, wireless communication devices, and the Internet are transforming business and communication patterns, calling the future of letters into question.1 Second, postal operations themselves are
evolving due to developments in information systems, postal automation and retail services, logistics, and distribution technology. Third, with growing globalization of the sector, national postal services face increased competition from domestic and foreign entities.

1 In 2002, the number of pieces of first class mail delivered in the US declined by 1.28 billion pieces
or 1.23 percent, the largest recorded percentage decline ever. For standard mail, which consists
mainly of advertising, volumes declined by 3 percent in 2002 (Geddes 2004). Worldwide, since
2001, the number of domestic letter post items has decreased slightly, with a fall of 0.4 percent in
2003. In terms of international letter post, the drop has been more significant, measuring 5.1
percent in 2003 (UPU 2004a)

.

Their first point of electronic technology has some merit but only in that it is used in addition to, not in place of, regular mail correspondence.

As well if it fails to recognize that not everyone whether through financial ability, physical ability, interest or location, has access to ‘developments’ mentioned.

It is rather reminiscent of an Ontario MPP who opined that everyone had cell phones anyway.

It is unlikely globalization is going to make a significant difference in whether your hydro bill is delivered.

Note the statistics of drastic decline..1.23% and 5.1%. They certainly give one pause.

The Challenges Confronting Canada Post
Notwithstanding its profitability in the past 11 consecutive years (Canada Post
Annual Report 2005), Canada Post faces major challenges. Mail volumes are decreasing, as domestic consumers increasingly favour electronic communications, and business mailers seek to lower their costs by using electronic alternatives. The latter poses the greatest challenge as the business and government sectors, which account for 90 percent of Canada Post’s letter mail and addressed ad mail

Notwithstanding the proven profitability of the enterprise, notwithstanding the above mentioned reasons why business and government are unable to switch to full electronic communication, notwithstanding that many things require hardcopy, notwithstanding these and other salient points the report continues on.

. As well, Canada Post is restricted by a price-cap formula set out in the Framework Agreement. It noted in its 2005 Corporate Plan that had the basic letter rate increased at the same level as the rate of inflation since 1995, the basic rate would have been 52 cents instead of 50 cents in 2005. This difference represented approximately $50 million in revenue. Labour issues also pose a challenge for Canada Post. The dominant union today is the Canadian Union of Postal Workers, whose strength creates difficulties for Canada Post when looking to improve efficiency and productivity.5 Further, Canada Post faces increased competition from international shipping and delivery companies. These companies have been acquiring, consolidating, and working with courier, air freight, logistics, and ground-carrier firms, and expanding and integrating their networks, putting downward pressure on prices. As well, some global players have expanded their retail and online presence, enabling them to reach the consumer and small business segments, the source of a significant portion of Canada Post’s business. For example, UPS and FedEx have captured a significant share of the small packages courier market. In 2000, UPS made a NAFTA Chapter 11 claim against Canada, arguing that Canada has not met its obligations to adequately supervise Canada Post’s letter mail monopoly,
which has been used to unfairly harm foreign competitors in Canadian markets. Other challenges include changes in the transportation industry. Pressures are being placed on the domestic air cargo industry by high fuel costs, new security rules, changes in commercial airline fleet size, and schedules.

Now we begin to edge into the deeper idealogical waters. Low cost and evil unions “whose strength creates difficulties for Canada Post when looking to improve efficiency and productivity”

Read cut wages and jobs, while spinning reasons for end cost hikes.

The Competition Effect.
Not only does private enterprise offer better management incentives, better monitoring incentives and capabilities than government ownership, private enterprise also fosters competition. Competition engenders allocative efficiency by removing from the monopolist the ability to set prices and assigning that role to the market. When producers in a competitive market are earning economic profits, other producers will enter and supply consumers with
goods until the price of the product has been driven down to the marginal cost of
production. In this way, consumers’ demands are brought in line with marginal
costs of supply and the deadweight loss associated with monopoly production is eliminated.

Could this be the same competition effect that brought us better service, lower prices and left us better off after hydro deregulation?

Conventional wisdom, in assigning a USO to postal operators, is that an exclusively reserved category of mail is required so that routes where postal revenues exceed costs provide the resources to finance uniform service in less densely populated or remote communities. Without an exclusive privilege, goes the argument, competitive entry would lead to creamskimming
on high-density routes, leaving the national operator with money-losing routes and requiring ongoing government bailouts or subsidies. A number of objections can be raised to this rationale for a legally protected postal monopoly. First, it is not clear that the USO requires strictly uniform prices and services across regions. As with other goods or services provided to remote or sparsely populated communities, one of the burdens of residing in such communities is the additional transportation and communication costs of providing goods and services over longer distances. The costs of travel to a hospital, for example, or the cost or scarcity of public transportation, are more burdensome for rural communities. Similarly, it is reasonable to imagine a relatively uniform package of services provided both to high-volume and lowvolume
routes but priced differentially to reflect the costs involved. Alternatively, service frequency and quality might vary across routes. In urban areas, many postal services involve door-to-door delivery, while on rural routes service is provided to roadside mailboxes or local post offices
Note:emphasis added

Interesting that after making the argument that deregulation would create a better system of service we then find that in fact the service would not be either equally applied nor be of equal cost. Furthermore, the areas targeted are those least likely to have access to electronic means of communication, especially such services as high speed internet connection.

It will be interesting to see if the ideologically sympathetic Tories pick up this report and run with it. The union busting they can spin successfully to their base, the denial of,or higher cost of service may be a little more difficult to spin to their traditional rural supporters.

Bickerton also argues that the density of delivery would decline with deregulation, resulting in a higher proportion of outside delivery time for letter carriers, less money available to improve working conditions, and pressure to increase workload and extend working time in line with competitors. We do not deny that in a more competitive environment there will be pressure on both management and workers to improve productivity to be able to compete effectively with private sector competitors. This is precisely the point. To the extent there are concerns about working conditions, this is what labour and employment laws are for. Maintaining a state-owned postal monopoly is not a sensible instrument for creating appropriate working conditions in the postal sector.

And we see again the lack of interest in fairness to workers. The reference to labour laws reads like a cheap shot as it is the adherents to this ideology who lobby governments for more lax labour laws.

In the EU, for example, member states’ transit-time targets are at their highest level since liberalization began, with 12 of them aiming to deliver 90 percent the next day and no member state with a target lower than 80 percent.
Note:emphasis added

90% sounds pretty good, can Canada Post do that well?

“Our service is good now,” Caines said. “We’re performing our letter mail at about 96 to 97 per cent on time. … We think we’re providing a good service. If privatization would improve on that, who knows?”

Oh dear, did somebody forget to if Canada Post was doing as well or better than the projected target examples being used?

It is thus critical, when changes in ownership or added commercial flexibility are introduced, that the new entity is subject to competition laws that prevent it from exploiting its dominant market position (Geddes, 2003). Even in New Zealand, where the overall experience of liberalization seems to have been positive, competitors of New Zealand Post have expressed dissatisfaction with the system, which they feel allows New Zealand Post to stifle competition. Regulating
downstream access for competitors, for example, to sorting facilities and mailboxes, is thus an important aspect of reform.

How many other businesses get to start using an infrastructure bought and maintained by someone else in order to try to create direct competition with said owner of infrastructure?

Interesting, to say the least. It would seem a case of pulling oneself up by anothers’ bootstraps.

Finally, experience in other countries suggests that there are benefits from making the universal service obligation a government responsibility, to reduce the need for a postal operator to finance universal service through markups on urban delivery, implicit tax subsidies, or credit guarantees.

So in other words they can’t do it better or more cheaply, they can only make the appearance of doing so by offloading the larger expense onto the government. Creating a deficit situation rather than the rolled into the overall budget costs that exists now.

I think the complete disdain for the populace is summed up rather nicely here.

As a consequence, it would be sensible politically, if not economically so, to create an oversight apparatus to accompany deregulation. To minimize error and administrative cost, we would recommend a light touch, perhaps the establishment of a complaints bureau where citizens could object to excessive prices in an area or market. Even if the regulator adopted an economically
grounded, cost-based analysis in reviewing prices, which may well allow higher prices, the existence of a review board may diminish political concerns about gouging. Such a board could also hear complaints from competitors about inefficient denials of access to essential facilities. Again, the most politically appealing approaches, for example, adopting a policy of not allowing price increases, risks undermining the reform enterprise entirely and thus some risk of unpopularity should be incurred.