President Bush's commission on postal reform will soon issue its report. The commission will be confronted with many complex decisions. Fortunately, numerous other countries have already begun postal reform. Those efforts can provide guidance for postal reform in the United States. While postal reform is now a truly global movement, countries have taken a variety of approaches to restructuring. I here review the details and, where possible, the effects of postal reform in a number of countries.

New Zealand. New Zealand is noteworthy for having completely abolished its postal monopoly. In 1986, New Zealand's government transformed the national post office into New Zealand Post, a government-owned corporation. That reform was somewhat similar to the creation of the U.S. Postal Service in 1970, with the new entity government-owned and headed by a board of directors.

Unlike the 1970 U.S. reform, however, New Zealand undertook a comprehensive evaluation of its monopoly statutes and subsequently introduced full competition. New Zealand initially limited its postal monopoly to NZ$1.75 (at the time, about 4.5 times the stamp price) with a weight limit of 500 grams (1.1 pounds) in 1987, pending additional study. That meant that a private competitor could carry a letter only if it charged more than NZ$1.75 or weighed more than 500 grams. The limit had the effect of creating a clearly defined reserved (or "protected") service for the government's postal monopoly. It made the scope of the government's monopoly transparent and subject to reduction as policymakers saw fit. A similar style of postal monopoly limitation would be used in numerous other countries.

In 1988, the New Zealand government's review resulted in a recommendation to completely repeal the postal monopoly by gradually reducing the reserved area of service. The monopoly's price limit was reduced in stages over several years.

New Zealand Post opposed the elimination of its monopoly. It marshaled three familiar arguments. First, private competitors would "skim the cream" from highly profitable rural routes, leaving only unprofitable routes for New Zealand Post. That would constitute a threat to uniform rates, and result in the closure of rural post offices. Second, New Zealand Post suggested that recent service improvements, and its relatively low postage rates, meant that reform was unnecessary. Third, it noted that postal services already faced competition from a large number of substitutes, including electronic mail, telephones, and facsimiles, so that de-monopolization was unnecessary.

The New Zealand government did not accept those arguments. The Postal Service Amendment of 1990 changed the postal law so that, over a two-year period, the price limit would be reduced further to NZ$0.80 and the weight limit to 200 grams. It also required New Zealand Post to increase public disclosure about the quality and cost of its services.

Because New Zealand Post anticipated increased competition, it closed one-third of its post offices and increased its charge for home delivery to rural areas in February 1988. Owing to a change in government and public complaint about the rural service charge, full deregulation did not come until 1998. The Postal Services Act of 1998 removed New Zealand Post's letter monopoly, permitting full competition. In a "deed of understanding" between the government and New Zealand Post, the price of a standard letter is capped at NZ$0.45 for three years. There is an agreed-upon frequency of deliveries to a specified number of points, with no rural delivery fee. The government requires that New Zealand Post continue to provide universal service, but it is not required to charge uniform rates.

New Zealand Post can invest in and acquire other companies, but the government must approve purchases of more than 20 percent in another company. It is free to enter into joint ventures and operate subsidiary companies. It pays the same taxes as any other company and pays the government a dividend. It can raise capital and borrow through the capital markets.

The results of New Zealand's bold reforms have been positive. New Zealand Post has introduced new services and improved its efficiency, without government support. Even the U.S. Postal Service has praised its performance: "Since corporatization, NZP has modernized its technology, transportation network, and retail facilities, and invested in subsidiary businesses, all funded by retained earnings and the sale of surplus assets. By 1995, with 30 percent more mail to deliver, costs had been reduced by 30 percent, and labor productivity had doubled."[1] It reduced its workforce by 40 percent without major labor strife, mainly through the use of early retirement and incentive packages.

Importantly, New Zealand Post reduced basic postage rates in 1995 from NZ$ 0.45 to NZ$ 0.40, and the real price of a letter fell by almost 30 percent between 1987 and 1995. It has earned a profit in every year since 1986, and earned NZ$21 million in its 2000-2001 year. Although New Zealand Post remains government-owned, competition has clearly had a positive impact on the firm and its customers.

Australia. Through the Australian Postal Corporation Act of 1989, the Australian government converted its post office into a government-owned enterprise, called Australia Post. Australia Post is required to operate commercially, and to provide universal service at a uniform rate throughout Australia. The cost of providing universal service is funded by an explicit cross-subsidy, and was estimated to be A$79 million in 1999-2000. Australia Post is subject to taxes and customs duties. The price limit on the postal monopoly was reduced from ten to four times the stamp price, with the weight limit reduced from 500 to 250 grams.

In July 1998, the government announced support for legislation that would further reduce the price limit on the postal monopoly to A$0.45, the same as the stamp price at that time. That is, private competitors would have been able to compete with Australia Post as long as they did not charge less than the stamp price itself. The Australian Parliament, however, did not pass those proposals.

Although the Australian reforms were not as extensive as those in New Zealand, the effects have generally been positive. The basic postage rate has remained stable at A$0.45 for over eight years, Australia Post has earned profits in every year since 1987, and on-time delivery has increased.

Finland. Finland was the first European country to abolish its postal monopoly. Finland Post, established in 1638, was part of PT Finland Group, composed of both postal and telecommunications services. It has not held an exclusive right to convey personal messages since 1991. The Postal Services Act of 1994 mandated that Finland Post become a limited liability company and that it provide nationwide delivery of mail, defined as an addressed item with a maximum weight of two kilograms. The Post continued to operate as a government-owned enterprise. Finland Post was supportive of reform, since it viewed competition from new technologies as a greater threat than competition from liberalization.

Sweden. The reforms in Finland were rapidly overshadowed by events in its larger neighbor Sweden. Sweden repealed its postal monopoly in 1992 rather than suppress CityMail, a new entrant in Stockholm. CityMail provided twice-weekly delivery of computer-generated mail in Stockholm. The Swedish Parliament approved a motion, effective January 1, 1993, to abolish the postal monopoly. Sweden Post supported the elimination of the monopoly because it realized that without de-monopolization it would not obtain the commercial flexibility it needed to compete effectively.

The parliament then enacted the 1993 Postal Services Act, which converted Sweden Post into a government-owned stock company. Sweden Post pays value-added tax. The National Postal and Telecom Agency, a new regulator, was also established by the Act.

The Swedish postal law was amended in 1997 to enhance the regulator's ability to guarantee universal service, and to implement the 1997 EU postal directive. Competitors can enter the delivery market, but must be licensed.

The responsibility for providing universal mail service rests not with Sweden Post, but with "the government or an authority appointed by the government." The Swedish government authorized the regulator to administer a licensing scheme in accordance with the act. While it has currently contracted with Sweden Post to provide universal mail service, it presumably could contract with others.

Sweden Post reduced its workforce by 30 percent, mainly though attrition. It accomplished that downsizing without a strike.

Although there is limited evidence on the amount of entry that has taken place in countries where competition is allowed, anecdotal evidence from Sweden suggests that it is substantial:

New firms have entered at a much larger number than was expected; nobody anticipated more than a few new entrants into the postal sector. CityMail was first to enter, as already described and was accompanied by a few distributors of unaddressed items and subsequently a large number of small local operators.

Of particular interest is the wave of small local operators that followed a few years after liberalization. The first was established already in 1994, but most followed in 1997-98. These local firms specialize in overnight distribution of mail within central parts of a small or medium sized city. None has been successful in the large cities in Sweden. They compete with price; most commonly 25-30 percent lower than Sweden Post. They do this by accepting lower income as private businessmen; not by competing in a low cost segment like City Mail, not using economies of scope and not by superior technology as all sorting is manual.[2]

Although many small firms have entered the market, their aggregate market share remains small. Even though Sweden has low population density, service levels have not suffered under competition:

The service level of the Swedish postal market is very high. Together with [the] Netherlands, it is considered the most efficient in Europe, according to an international survey. Since the 1970s, the system is designed to allow overnight distribution all over Sweden. About 95 percent of first class mail is delivered on time, which is far beyond the state demands of 85 percent. Despite [the fact] that Sweden is among the least populated [countries] per area unit in Europe, only 1,150 households in the country do not have daily delivery.[3]

Norway. In Norway, the Norwegian Post and Telecommunications Authority (PT) has the responsibility for regulating the postal market. The Postal Services Act of 1996, as amended in 1997 and 1999, limited the postal monopoly to the dispatch of addressed, closed letters weighing less than 350 grams, with a maximum postage of five times the standard first-class letter postage, as long as those letters do not contain books, magazines, catalogues, or newspapers. Norway Post is subject to a licensing system administered by PT.

A large number of distribution services and messenger and transport companies offer competing services in the nonreserved area. Norway Post's license ensures that it provides universal service, that it complies with the provisions of the EU's postal directive, and that it provides equitable and nondiscriminatory access to its postal network.

Germany. Germany undertook substantial postal reform through a sophisticated three-step plan. Postreform I, in 1989, resulted in the reorganization of the Ministry for Posts and Telecommunications. It established separate departments for postal services, postal banking, and telecommunications. A new board, with members from the private sector, was created to oversee the postal services department, called Postdienst.

Postreform II, in 1994, converted Postdienst into Deutsche Post A.G., a corporation with all shares owned by the government. It also amended the German constitution to guarantee "appropriate and adequate" universal postal services.

The German parliament agreed to Postreform III in 1997 that, as in Sweden, recognizes universal service as a responsibility of the German government, not an obligation of Deutsche Post. That distinction is critical because funds to provide for universal service need not come from markups on urban delivery, implicit tax subsidies, credit guarantees, or other sources. Instead, those funds are obtained explicitly through revenues from licenses. All delivery services carrying addressed mail weighing less than 1,000 grams (2.2 pounds) must obtain a license.

Postreform III also repealed the postal monopoly as of the end of 2002. That is, Postreform III granted Deutsche Post a monopoly on the carriage of letters weighing up to 200 grams and costing not more than five times the basic stamp price until the end of 2002. Recently, however, the German government announced that it would delay the repeal of the postal monopoly until 2007, citing slow postal reform by the European Commission.

Reg TP, the telecommunications regulator, was designated also to regulate postal services. Reg TP can hold hearings and compel the production of evidence. Reg TP is responsible for ensuring universal service, and it is authorized to administer the licensing scheme and impose standards on postal operators.

Germany is one of the few countries to institute meaningful changes in ownership structure. Deutsche Post was partially privatized on November 11, 2000, in that country's largest public offering of the year. About 31 percent of the firm was offered publicly, raising $5.6 billion. Those shares were split evenly between institutional and private investors. The offering was successful, as investors applied for eight times the number of shares available. Additionally, the German government cleared the way for majority private ownership in Deutsche Post, but no date has been set. Deutsche Post began operating under the name of Deutsche Post World Net (DPWN) in early 1999.

The effects of those reforms have generally been positive. DPWN has reduced its workforce by 38 percent, mainly through attrition. It has become an aggressive competitor, offering new products and services. Some of DPWNÕs tactics have, however, raised concerns about the use of its monopoly power and other privileges to engage in anticompetitive behavior.

DPWN has been very aggressive in acquiring other firms. It holds a 72 percent stake in DHL, the world's largest courier company. It has also taken over one of the largest global logistics companies, Danzas. DPWN was able to reduce its workforce by about 38 percent, from 379,000 in 1990 to 235,500 in 1999, without layoffs.

The Netherlands. The Netherlands is unique in that a majority of its postal service is now privately owned. The Dutch government transformed the post and telecommunications administration into Royal PTT Nederland (KPN) in 1989. PTT Post is the postal subsidiary of KPN. The Dutch government sold a 30 percent stake in KPN to the public in 1994, and another 22 percent stake in 1995, reducing the government's share to 48 percent.

Regarding market structure, PTT Post retains a monopoly over the delivery of letters weighing up to 500 grams. Express mail services can compete in the reserved area as long as their prices are higher than PTT Post's. PTT Post has a universal service obligation, which is funded through its monopoly service.

Unsurprisingly, privatization in the Netherlands created an aggressive, commercially oriented firm. PTT Post, in 1991, joined with the post offices of France, Germany, the Netherlands, Canada, and Sweden to purchase 50 percent of the Australian transportation conglomerate TNT. In August 1996, PTT Post acquired complete control of the joint venture operations by purchasing TNT itself.

In June 1998, KPN spun off TNT Post Group (TPG), which is now a fusion of a national post office and a global express company. TPG, however, remains legally obligated to provide universal service and continues to enjoy a legal monopoly over the carriage of letters weighing 500 grams or less, with certain price limits. TPG has announced its support for the repeal of its monopoly provided that other large competitors, such as Deutsche Post, are similarly de-monopolized.

Switzerland. Postal reform in Switzerland has not progressed as far as in some other European countries. It appears to be about where the United States was after the passage of the Postal Reorganization Act of 1970. It is instructive to briefly examine the Swiss case, however, since Swiss postal reform was similar to U.S. reform and has produced similar results.

The Swiss post office historically was part of Swiss Post PTT, comprised of both postal services and telecommunications. The Law on Postal Services of 1924 and the PTT (post and telecommunications) Organizational Law of 1960 created the institutional structure for postal services in Switzerland. Under those laws, Swiss Post was a government-owned monopoly, and was highly constrained in its business decisions. Like the U.S. Post Office, the government made postal pricing, financing, and personnel decisions. Politics dominated postal decision-making, and Swiss Post incurred large annual deficits.

Reform began in the early 1990s. The Swiss government passed a law in May 1992 on telecommunications, which liberalized some areas of the telecommunications sector, and eliminated the large subsidies of Swiss Post by Swiss Telecom as of January 1, 1998. On December 31, 1997, Swiss PTT was split into two companies, Swiss Post and Swisscom.

The Swiss Postal Law of 1998, however, was the key organizational reform. There were five officially stated goals of the law: (1) gradual liberalization of the postal market; (2) guaranteed universal service; (3) providing the financial means for universal service; (4) increasing commercial freedom for Swiss Post; and (5) coping with EU developments in the postal sector.

At least some of those goals echo the intent of the U.S. Postal Reorganization Act of 1970. Similar to the Postal Reorganization Act, the Swiss Postal Law left Swiss Post as a government-owned monopoly, and severely restricted it in terms of financing and personnel decisions. Swiss Post itself is required to provide universal service. Neither express mail nor international parcels fall under Swiss Post's monopoly, which is limited to mail and parcels up to two kilos. Universal service is to be financed through money collected from monopolized activities. As in the case of the U.S. 1970 act, the Swiss reform sought to imitate the board structure of a private corporation and to create a more "commercially oriented" atmosphere.

Several consequences of the Swiss law are similar to the U.S. experience. First, since it remains government-owned, Swiss Post continues to be hampered by capital constraints and lacks sufficient cash to pursue meaningful research and development. It must go to the Swiss government, rather than to the capital markets, for additional capital. Second, there is confusion over the degree to which competition laws apply to Swiss Post. Third, there is controversy over the funding of pension liabilities, with negotiations under way between the government and Swiss Post over who will pay. Many personnel decisions remain in government hands, and wages are considered to be about 30 percent above market, remarkably similar to the estimate of 28 percent for the USPS. Fourth, political interventions occasionally occur, and decision-making processes are slow. Fifth, as in the United States, the norms by which rates are to be set are contradictory.

An important difference between the Swiss and the U.S. laws is that the Swiss law, as per the suggestion of the European Union, limited the monopoly in order to provide just enough revenues to guarantee universal service.

While perhaps an improvement over the old arrangements, the Swiss Postal Law reveals the same inadequacies as the Postal Reorganization Act. It underscores the importance of either undertaking meaningful ownership changes, significantly increased competition, or both.

Spain. Correos y Telegrafos is the government postal authority in Spain. Commercial freedoms were given to Correos in 1991. Correos bears examination because its monopoly power is defined in an unusual way. The reserved services in Spain are over the collection, distribution, and transportation of letters between cities and villages (i.e., inter-urban mail), while the delivery of letters within cities (i.e., intra-urban mail) is open to competition. That is similar to the original task of postal services in the United States, which was to deliver mail between cities.

The scope of the postal monopoly was further reduced in 1997 to inter-urban services up to a maximum of five times the stamp price. Interestingly, there is no uniform rate in Spain. The price of mailing a letter depends on whether it is delivered to the same urban area or to another urban area within Spain.

United Kingdom. The structure of postal services in the United Kingdom began to change in the mid 1990s. Royal Mail was obligated to pay taxes in 1995. The government relaxed limits on its capital spending, and it was allowed to enter new markets, for example, through joint ventures. Its disclosure requirements were also increased.

The Postal Services Act of 2000 radically altered U.K. postal services. The act transferred the post office's assets into a private law company with all shares owned by the government. The Post Office Group changed its name to Consignia in March of 2001. The act also created a new regulator, the Postal Services Commission, or Postcomm.

Importantly, the act created a detailed licensing scheme to replace the 340-year-old postal monopoly, which was abolished. Postcomm was granted the exclusive authority to issue licenses, and no business may deliver letters without a license, unless the price of delivery is at least £1.00, or the letter weighs at least 350 grams.

Postcomm was given broad authority to grant licenses and to set conditions for licensees subject to the observance of three goals. First, Postcomm must ensure the provision of universal service, where universal service is defined as providing delivery service to each address each working day. Service must be provided at uniform rates, and must be affordable. Second, Postcomm must promote competition between postal operators. Third, Postcomm must "promote efficiency and economy on the part of the postal operators."[4] Postcomm may also place conditions on the services provided by a licensed operator outside of the reserved area.

Postcomm issued the first postal license to Consignia on March 23, 2001. The license set out detailed conditions regarding universal service obligations, service standards, access to facilities, prohibitions against unfair commercial advantage, mergers, financial disclosure, and many others. Importantly, Postcomm itself is able to define the meaning of the universal service obligation. In other countries, the government defines it. Also, the regulator must explicitly consider the effects on competition and efficiency when granting the license.

In January 2002, Postcomm proposed a three-stage process that would result in the complete elimination of the postal monopoly. The first phase would take place between April 2002 and March 2004. It would eliminate the monopoly on bulk mail shipments of over 4,000 pieces and on other services that amount to approximately 30 percent of Consignia's market. Phase two would take place between April 2002 and March 2006. It would lower the bulk mail threshold to between 500 and 1,000 pieces per shipment. That would likely eliminate the monopoly on another 30 percent of Consignia's market. Phase three would take place no later than March 31, 2006, and would eliminate all restrictions on market entry.

The initial results of the U.K. reforms have not been positive. Consignia has recently sustained large losses and will undergo further restructuring, including a change in name. Loss of working days due to strikes has been a problem. Its privatized Dutch rival, TPG, has captured substantial market share from Consignia. Commentators have noted that Consignia's problems stem in part from its failure to privatize.

Summary data on international postal services are provided in the table below. This table facilitates rapid comparison of postal reforms and suggests the degree to which many countries have recently taken steps toward reform of their posts.

 

Summary and Conclusions

This review suggests several lessons from international postal reform for the United States. First, and perhaps most importantly, substantial reform has in fact taken place in many other countries, which indicates that meaningful reform in the United States is both politically feasible and in concert with other countries' policies. Some postal services (but not all) supported the elimination of their monopolies because they realized that additional commercial flexibility would not be granted under monopoly. Ambitious postal reform may be possible in the United States also.

Second, postal reform has typically included a major change in the delivery monopoly, either through its outright elimination (as in Finland, Sweden, and New Zealand) or through price limits on the scope of reserved service, usually defined as multiples of the stamp price. Indeed, it does not appear that any country has privatized, although postal services increased commercial flexibility, or reduced privileges and immunities without also eliminating or limiting its postal monopoly.

Third, reform has frequently involved important changes in the universal service obligation. Many governments have removed the burden of providing universal delivery service from the postal service itself and shifted it to another entity, such as the regulator. Universal service has also been made a condition of licensure, as in the United Kingdom.

The experience in countries that have eliminated their monopolies, such as New Zealand and Sweden, suggests that universal service will be maintained at affordable prices without a delivery monopoly. Many reforms have included a mechanism for making the cost of providing universal service explicit, including through a universal service fund.

Fourth, postal reform in some countries has included changes from government to private ownership, as in Germany and Holland. Sales of equity to the public have been successful, and have resulted in modern, dynamic, commercially oriented postal services.

Finally, preliminary evidence suggests that international postal reform has had positive effects. There is no evidence of price spikes, and some postal services, such as New Zealand, have even lowered their basic postage rate. Although labor relations have been problematic in some countries, such as the United Kingdom, many posts were able to reduce their workforces without major layoffs, instead relying on attrition.

Notes

1. U.S. Postal Service, Transformation Plan (April 2002) at H-23.

2. Peter Andersson and Mats Bladh, "Experiences from Liberalizing the Postal Market in Sweden," (Department of Technology and Social Change, Linköping University, Sweden working paper), pp. 7-8.

3. Andersson and Bladh, p. 10.

4. U.K. Post Act, §§ 3-5, 125. See also U.S. Postal Service, Transformation Plan (April 2002) at H-11.

Rick Geddes is assistant professor in the Department of Policy Analysis and Management at Cornell University and the author of Saving the Mail: How to Solve the Problems of the U.S. Postal Service (AEI Press, 2003). He is a research fellow at the Hoover Institution and an adjunct scholar at AEI.

Why We Need Reform

President Bush recently named a nine-member commission to study postal reform--the first time a U.S. president has created such a commission since the Johnson administration. That action is timely and necessary, since the Postal Service's structure will certainly change dramatically at some point in the not-too-distant future. It can be altered deliberately now by design, or chaotically in the future by default. The President's Commission on the Postal Service enjoys a rare opportunity to accomplish the former.

The U.S. Postal Service is gigantic by almost any standard. In 2002 it earned $66.5 billion in revenue. It employed 854,000 people, a number greater than the population of Delaware. It handles about 40 percent of the world's mail. Proper organization of such an entity is clearly important for U.S. economic health.

The Postal Service was formed through the Postal Reorganization Act of 1970. While the act had several goals, its main aim was to create a new service with the financial and managerial independence that the old, highly politicized Post Office had lacked. Among its new powers, the USPS could negotiate wages, set prices with regulatory oversight, borrow from the Treasury, and independently sue and be sued. The act exempted the USPS from federal, state, and local taxes, and granted it the power of eminent domain. The Postal Service was to become fiscally self-sufficient by breaking even over time. The act left undisturbed two key elements of the Post Office's structure, however: a monopoly over letter delivery (as well as a mailbox monopoly) and government ownership.

The act was an improvement over the old Post Office. The productivity of the postal system improved. The cost of the postal system was shifted onto mail users, and away from direct taxpayer subsidies. The Postal Service was, in many ways, operated in a more businesslike manner.

But the act also failed in important ways. It failed to reduce cross subsidies from monopolized to competitive mail classes, but rather appears to have exacerbated them. It failed to keep postal wages comparable to private sector wages, an express aim of the act. Although it did reduce the direct cost to the Treasury, it did not maintain taxpayers' equity in the Post Office, but rather allowed it to be dissipated through recurring deficits. The Postal Service's net worth is now negative $1.36 billion, down from positive $1.7 billion when the Postal Service began in 1971.

Although it has made progress recently in cutting costs, the Postal Service appears to be in a slow-motion train wreck. Its revenue base is eroding. For the first time in recent history, in 2002 the number of pieces of first-class mail delivered (the way one would measure demand for first-class mail) actually declined, by 1.28 billion pieces, or 1.23 percent. The number of first-class letters mailed has declined only twice since 1945, and never by so large a percentage. First-class mail constitutes over 57 percent of the Postal Service's total revenue from mail. The decline caused the Postal Service's revenue from first-class mail to fall by $607 million, or 1.7 percent.

The Postal Service's other big mail class is standard mail, mostly advertising items, accounting for almost 25 percent of revenues from mail delivery. The number of standard mail pieces delivered declined more precipitously, by 3 percent, while revenues from that class increased slightly because of rate hikes.

Other mail classes also showed declines. The number of priority mail pieces declined by 10.7 percent. The number of express mail pieces declined by 8.6 percent. The number of periodicals mailed declined by 1.8 percent. The number of packages mailed declined by 1.64 percent. International airmail pieces declined by 15.4 percent. Unsurprisingly, the Postal Service's financial condition has suffered as a result. Its net loss in 2002 was $700 million, on top of a $1.7 billion loss in 2001.

The reason for this decline in demand is clear. In the thirty-two years since the act was implemented, a momentous transformation has taken place in the communications marketplace. New communications technologies that were only an idea in 1970 are now in wide use. Through electronic mail, people can communicate written messages instantaneously anywhere in the world at low cost. New technologies, such as direct broadcast satellite (DBS) allow users to receive those messages without accessing their computers. The wide availability of facsimile machines and cellular phones, as well as lower long-distance telephone rates, have also played their part. Innovations in communications technology are likely to continue apace, causing further declines in the demand for physical mail delivery.

Additional rate increases are not the solution, as they will only encourage further substitution into alternative communications services. Nor is enhanced commercial freedom for the Postal Service, in its current form, a viable alternative. That would only encourage it to compensate for revenue shortfalls by unfairly competing in its nonmonopolized services with private firms that do not enjoy the Postal Service's wide variety of privileges and immunities.

We are thus at a decisive moment in U.S. postal history. The model upon which the Postal Service was created, that of an independent, government-owned agency enjoying a legally enforced monopoly, is inappropriate for the United States today. Inexorable, secular technological change cannot be addressed through minor bureaucratic renovations. The reforms recommended by the president's commission must represent a bold departure from the outdated 1970 model.

The performance of the Postal Service suffers because of the two key elements of the Post Office left intact by the 1970 act: legally enforced monopoly and government ownership.

The Monopoly Power. The adverse economic effects of legally enforced monopolies are well known. The firm will misallocate resources by charging excessively high rates for its monopolized services (here the delivery of addressed letters), and will not minimize costs, as would a firm facing rigorous competition. A monopoly firm will also be slow to innovate. Indeed, those are some of the rationales offered for enforcement of antitrust law.

The standard response is that, in certain cases, the social benefits of enforcing a monopoly in some industries exceed the social costs. Here the benefits allegedly include the provision of universal delivery service, or guaranteed letter delivery to all communities.

But the logical link between the desirability of universal service and the need for enforced monopoly does not exist. First, firms facing competition have a strong business incentive to provide service to all communities. All else equal, customers will prefer dealing with a firm that has a universal delivery network over one that does not; universal service is an important and valuable asset. Private delivery firms such as United Parcel Service and Federal Express currently stress the fact that they "go anywhere" when advertising their services. While private delivery firms may lose money on particular delivery routes, they have a strong incentive to nevertheless maintain universal service for its business value.

Second, if a regional delivery firm is too small to offer nationwide delivery itself, it has a strong incentive to contract with another firm to provide such an offering.

Third, the experience of other countries that have eliminated their postal monopolies strongly suggests that universal service is not harmed by competition. Sweden and New Zealand, both with remote hinterlands, have eliminated their postal monopolies, and delivery service to rural areas has been maintained.

Fourth, a host of recent statistical studies demonstrate that the cost of serving rural customers is in fact not significantly higher than the cost of serving urban customers. Arguments for the delivery monopoly invariably assume that the cost of rural service is significantly higher, and that rural communities would therefore not receive letter delivery service in a competitive market. But if there are no significant cost differentials, such arguments disappear.

Finally, if the provision of universal service remains a source of concern, the government can issue licenses to particular firms with the proviso that they maintain universal service. If necessary, detailed conditions can be placed on those licenses. To reiterate, universal service simply does not imply legally enforced monopoly. The social benefits of the postal monopoly are thus likely to be zero.

Regarding the social costs of the postal monopoly, the 1970 act created the Postal Rate Commission to control the Postal Service's rates. For a variety of reasons, however, the commission is unlikely to be effective at controlling the Postal Service, and that failing raises the social costs of the delivery monopoly.

First, the act did not give the commission the power to actually set rates. The commission merely recommends rates and classifications to the Board of Governors of the Postal Service after the Postal Service has requested a rate increase. The board has the authority to overrule its own regulator on rate increases, provided it is unanimous. In an analogously regulated investor-owned electric utility, the utility's board of directors would have the authority to overrule the state public utility commission on rate matters.

The postal Board of Governors has used that power twice. It overruled in 1981, raising first-class rates to 20 cents after being thrice rebuffed by the commission. The board also voted unanimously to overrule the commission and implement the rate increases effective July 1, 2001. The chilling effect of the board's veto power may have a greater effect on the commission's decisions than its actual use.

Second, the commission is weak because the Postal Service is government-owned. Because it is government-owned, there are no tradable shares and thus no share prices. Because there are no share prices, the commission cannot reduce the wealth of stockholders by reducing rates, or by threatening to do so. A public utility commission can shrink equity values by refusing to raise rates, raising them slowly, or by reducing them. This important power normally places substantial pressure on managers in a private firm because private ownership allows the firm to create strong links between shareholder wealth and the interests of managers, which are necessarily eliminated by government ownership.

Third, the structure of the ratemaking process prevents the Postal Rate Commission from imposing a true revenue constraint. The commission must simply take the Postal Service's costs as given, and try to allocate those costs across the various mail classes as best they can. Under private ownership, denying rate increases will reduce equity values, as noted. However, the Postal Service can simply claim inability to meet its costs, such as payroll, forcing the commission to either raise its rates or risk overdrafts. Indeed, in his 1994 testimony, the Postal Service's main revenue witness, John H. Ward stated, "Despite maximum allowable annual borrowing for operating and capital purposes ($1 billion for operating purposes and $2 billion for capital purposes--net), the end-of-year cash and investment balances would be less than the amount necessary to fund one bi-weekly payroll (currently about $1.1 billion)." What is the commission to do if Postal Service paychecks will begin bouncing without a rate increase? The commission consequently has little power to constrain Postal Service costs. The break-even constraint is thus considerably softer than the revenue constraint of a private competitive firm.

Fourth, the Postal Rate Commission does not have the power to regulate the quality of postal services. On July 25, 1990, the commission formally advised the Postal Service of its opinion that it should not implement a plan to downgrade nationwide first-class delivery standards. On the very next day, Postmaster General Anthony Frank responded in a letter stating that, "After consideration of the opinion, we have concluded that it does not warrant changing our scheduled Saturday implementation of overnight standard changes." The commission is thus unable to determine such critical variables as the number of deliveries per day, per week, and the speed of deliveries. A public utility commission, in contrast, has control over variables like the reliability of electric power by linking allowed rates of return to outages. Additionally, performance standards for a privately owned, regulated utility are expressly stated. In telecommunications, for example, details like time until dial tone, length of repair waits, and speed of infrastructure expansion are expressly specified.

Fifth, the commission is weak because it lacks adequate information on Postal Service operations. The Postal Service has the best information on its operations, and the commission depends upon the Postal Service to provide that information. As former chairman Clyde S. DuPont stated, the Postal Rate Commission lacks

explicit statutory authority . . . to prescribe or require the Postal Service to collect particular types of data. Although our discovery powers are generally sufficient to permit us to test and clarify evidence presented in our proceedings, the service has treated the actual collection of data as its exclusive domain. It reserves the design of its statistical systems and the data to be released as a matter of unilateral discretion. . . . Thus, the commission and the parties to our proceedings have been tied to the data the Postal Service is willing and able to make available.[1]

Importantly, this is in contrast to the information disclosure requirements faced by a privately owned regulated utility, which includes subpoenas, audits, and other measures. The control the Postal Service enjoys over its information is likely to significantly weaken the commission's ability to regulate it.

Postal scholars have noted that the commission is weak, and that this essentially allows the Postal Service to price in an unconstrained manner. As political science professor John T. Tierney stated, "It hardly seems an acceptable situation that a government agency enjoying a monopoly over certain of its services has the ultimate power to put into effect whatever rates it chooses."[2]

It is unlikely that regulation is effective at keeping the social costs of the Postal Service's monopoly low. Given the enforced monopoly's low social benefits and high social costs, society would be better off if it were repealed. The Postal Service would also be better off, since its incentives for innovation and cost efficiency would improve. Nor will the Postal Rate Commission become an effective regulator simply by granting it more powers through legislation. A change in the Postal Service's ownership structure is critical to reform.

Government Ownership. The second major oversight of the 1970 reform was leaving the Postal Service government-owned. The rationale for government ownership remains unclear. Even the Postal Service does not assert that government ownership is necessary to ensure universal delivery service, which would be absurd.

It is useful to recount the views of the last commission to study reform in 1968, commonly known as the Kappel Commission. Notably, most members of that commission believed that the Postal Service would be better off under investor ownership. Nevertheless, the Kappel Commission suggested several reasons for retaining government ownership:

If the postal system had begun after the country had reached an advanced stage of technological, social and economic development, it would in all likelihood have emerged as a private industry suitably regulated to ensure satisfactory service levels and fair prices. Most members of this Commission would favor an investor-owned postal system [emphasis added].

 

We recognize, however, that formidable barriers stand in the way of a transfer of the existing postal system to private ownership. The Post Office has had two hundred years as a Government operation. Time has nurtured the attitude that the postal service must be a Government responsibility.

 

Private operation, furthermore, presumes a buyer and a seller. It is clear that an organization with the Post Office's earnings record would not attract investors. Our contractors estimated the current appraised value of postal fixed assets at approximately $1.7 billion. That figure, together with the $5 billion modernization requirement estimated by the Post Office, would make for formidable stock and bond issues. It is highly improbable that issues of the size necessary to complete financing within a reasonable period could be undertaken in these times.[3]

Aside from the unsatisfying assertion that there is a public perception of inevitable government ownership, the commission issued two arguments questioning the feasibility (as opposed to the desirability) of placing ownership in private hands. First, the Post Office's earnings record would not attract investors, and second, the size of the issue is simply too large for the capital markets to absorb. The first of these arguments ignores the fact that the Postal Service's poor earnings record is itself a function of government ownership.

Under government ownership, there are no well-defined residual claimants. Residual claimants are those who have property rights to the cash flows of an organization, such as stockholders in a privately owned, publicly traded corporation, or the partners of a partnership. While "residual claimants" may seem like an arcane term, it implies what we normally think of as "accountability." Without a well-defined group of owners, it is unclear to whom the firm should be accountable. A common criticism of the Postal Service is that it lacks accountability to any specific group. Indeed, in 1981 after first-class rates rose to 20 cents, consumer advocate Ralph Nader noted that:

The new 20-cent first-class stamp represents not only runaway postal costs but also the unchecked power of the Postal Service. The new rate came about because the mail system's Board of Governors deliberately overrode the Postal Rate Commission (P.R.C.), which, on three separate occasions, had found the latest increase unnecessary. We can only conclude that the Postal Service is no longer accountable to anyone-not to the P.R.C., not to the President, not to Congress and certainly not to the American people.[4]

Without a well-defined group of residual claimants, an enterprise has no incentive to increase the size of its cash flows through cost minimization and revenue maximization. Regarding the Postal Service's performance record and public offerings, the capital markets would take into account the change in incentives brought about by private ownership in pricing its shares. Additionally, the value of the Postal Service is a direct function of the institutional arrangements made before its public offering, regarding pension liabilities and health care costs, for example. There is no reason why those arrangements cannot be made attractive to investors.

The Kappel Commission's second argument against private ownership was that postal services in the United States were simply too large for the capital markets to absorb. Given today's global capital markets, that argument seems obsolete, whatever plausibility it might have had in 1968. Moreover, nothing prevents public offerings from being undertaken in installments over a period of years, if necessary.

Both of the above contentions are now called into question by Deutsche Post's successful large November 2000 offering, in which investors applied for eight times more than the number of shares actually available. The Dutch post office has similarly privatized. Additionally, there have been successful privatizations of large telecommunications firms, including British Telecom, Deutsche Telekom, Telefonica, Telstra, Telmex, and others. Given the large privatizations in the United Kingdom and elsewhere over the past twenty years, it is doubtful that similar arguments could credibly be made today. Such an offering is now feasible and investors view postal shares as profitable.

These appear to be the Kappel Commission's only arguments against privatization, a strategy it otherwise clearly preferred.

What Reform Should Entail

Postal reform today must address the twin problems left unresolved by the 1970 act. The social benefits of addressing both--monopoly power and government ownership--are enormous.

Numerous other network industries, including trucking, airlines, natural gas, and railroads, were demonopolized in the 1970s and 1980s, creating huge benefits for consumers. The evidence from other countries that have eliminated or greatly limited their postal monopolies suggests that consumers of delivery services in the United States will also benefit from demonopolization of the Postal Service. Any serious postal reform must address the delivery monopoly.

A first, critical step in that process is to decouple the Postal Service's delivery monopoly from its universal service mandate. The Postal Service continues to argue, despite the lack of logic, that it needs a monopoly over letter delivery in order to ensure universal delivery service. The best way to address that concern is to move responsibility for universal service to another entity. Congress should delegate that responsibility to the Postal Rate Commission. The commission can then address universal service concerns through licensing arrangements. The experience in other countries, such as New Zealand, indicates that the issuance of licenses can be quite liberal and universal service will be maintained. The broad issuance of licenses would inject much-needed competition into the letter delivery industry.

The second issue that must be addressed is accountability, or ownership. This presents the President's Commission on the Postal Service with a golden opportunity. Many postal workers have built their careers on expectations of a government-owned post, and the transition to a competitive market may disrupt those careers. It thus seems appropriate that postal workers receive shares in the new investor-owned entity.

The issuance of ownership shares to postal workers and managers is a case where fairness and economic efficiency are aligned: employees would receive compensation for the disruption of their careers, while efficiency would be enhanced through improved incentives to innovate, keep costs down, improve service, issue new products, and become more responsive to customers' needs. Shares would have to be sold on the equity markets as well; otherwise postal employees would be able to trade shares only with each other. Such public trading of shares would improve corporate governance.

The ownership transition would require a host of additional institutional changes. Those changes can be appreciated by considering the institutional setting in which a typical privately owned, publicly traded corporation operates. For example, the Postal Service would have to be given additional commercial freedom to divest underperforming activities and make other prudent business decisions, such as the closing of unprofitable post offices. It may wish to replace them with counter services using other outlets, for example grocery stores, or sell them to another provider.

Importantly, the Postal Service must also be relieved of any privileges and immunities it has enjoyed, such as special borrowing privileges and exemption from taxation and the antitrust laws. It would also face the same disclosure requirements facing any publicly traded firm. A crucial aspect of the ownership transition is that any aspect of government sponsorship or government preference be eliminated. Otherwise, the Post Office would continue to benefit from a perception of government support.

Summary

Reform of the U.S. Postal Service is necessary and timely. Demand for its core services is declining. Because that decline is due to the widespread and increasing use of new communications technologies, it is likely to continue. The Postal Service is sustaining losses as a result, which will also continue to worsen.

The Postal Service is unable to respond to this new environment because of two key elements of its structure left intact by the 1970 act--a monopoly over letter delivery and government ownership. The putative motive for the delivery monopoly is ensuring universal service, but universal service simply does not require a legally enforced monopoly. The Postal Rate Commission does not have adequate authority to constrain that monopoly.

Many other network industries in the United States have been successfully demonopolized, and postal monopolies in other countries have been eliminated.

There is no legitimate rationale whatsoever for continued government ownership. The social benefits flowing from the selling of ownership shares in the Postal Service are enormous. Postal employees could be given a stake in the firm, and it would become accountable to a clearly defined group. Since prices for its ownership would be established, it would be possible to link managerial compensation to a meaningful measure of firm performance. The Postal Service would then have the incentive to keep costs down, to create new and innovative products, and to become more responsive to customers' needs.

The minimum, key reforms that must take place to improve postal services in the United States are:

• The Postal Service's monopoly power must be decoupled from its universal service mandate.
• Congress should make universal service the responsibility of the Postal Rate Commission rather than of the Postal Service. That would leave Congress and the commission free to guarantee universal delivery service in the best way possible, including the use of other firms, which would end the postal monopoly.
• Ownership shares in the Postal Service should be issued (as was done in Germany and the Netherlands). Postal employees should become part owners of the firm, but shares should trade on the open market as well.
• The Postal Service should be granted additional commercial flexibility to divest underperforming activities and make other prudent business decisions such as the closing of unprofitable post offices.
• The Postal Service should be relieved of any privileges and immunities it enjoys, such as special borrowing privileges and exemption from taxation and the antitrust laws. In a competitive market, it is crucial that no one firm receive any particular government-bestowed benefits.

Notes

1. Clyde S. DuPont, "The Postal Rate Commission," in Perspectives on Postal Service Issues, ed. Roger Sherman (Washington, D.C.: AEI Press, 1980), 115.

2. John T. Tierney, U.S. Postal Service: Status and Prospects of a Public Enterprise (Boston: Auburn House, 1988), 210.

3. President's Commission on Postal Reorganization, Towards Postal Excellence (Washington, D.C.: Government Printing Office, 1968), 2.

4. Ralph Nader, "Price Fixing by the Postal Service," The Nation, December 12, 1981, 631.

Rick Geddes is assistant professor in the Department of Policy Analysis and Management at Cornell University and the author of Saving the Mail: How to Solve the Problems of the U.S. Postal Service (AEI Press, 2003). He is a research fellow at the Hoover Institution and an adjunct scholar at AEI.