The financing of a universal postal service

Privatization, liberalisation, competition: these words are often used in speaking of the telecommunications, energy and transportation sectors. In a liberalised environment competition and public services can enter into conflict. Liberalisation requires thinking about new ways to finance a universal postal service. 

Transportation, postal services, telecommunications services, energy,  public water companies – with all these services, there is a public service aspect added to any purely commercial activity. Boite-postaleThe daily delivery of mail throughout a nation, the ability to avail oneself of regular public transportation that covers a wide area, the power to connect people through the telephone system (and eventually connect them via a high-speed internet service)  - all this is part of what is referred to as universal service. This refers to a group of goods and services of high quality that are accessible to all users without exception (and no geographical area is excluded), for a uniform and affordable price.  These services are not always profitable, but society values them highly, whether in ecological or social terms, and political authorities are usually ready to devote a portion of the government’s resources to them.

The postal services market

In a market that is open to competition, the means of financing a universal postal service has to be re-examined. The postal services market, which has been completely liberalised since January 1, 2011, clearly demonstrates this fact. In this sector, the duties of the universal service are specified in European directives that define the liberalisation of the market for postal services; in Belgium, the universal service obligations are part of a management contract between the historical provider of universal services, BPost, and the state itself. The obligations of the universal service are multi-dimensional and varied but they are limited to only a few products such as individually addressed pieces of mail and small packages weighing less than 2 kg. Universal service requirements touch upon the quality of the postal service and its availability everywhere in Belgium, the price structure and the postage price level. The provider of the universal service is required to distribute and collect mail on a daily basis everywhere in Belgium. Quality of service in terms of transit times and the accessibility of pick-up points must also meet a certain standard. The products offered under universal service must be reasonably priced, and it often happens that the regulating agency imposes a uniform price structure that does not depend on the destination of what is mailed. All European countries apply similar rules, though there are differences in the definition of levels of quality (some countries, for example, require Saturday delivery of mail) and in postage pricing constraints.

When it is necessary to insist on such constraints by regulation, this is because otherwise the products involved would not be made available. The classic example is that of daily mail delivery in a sparsely populated area where the cost of providing the service is not covered by postage fees. Thus the duties imposed as part of a universal service represent additional costs for the business that assumes the responsibility. Before liberalisation, such costs were paid for by profits gained in the more profitable segments of the market, for example, mail delivery in urban areas, where the historical provider had a monopoly. Universal service was financed through cross-subsidies between the provider’s business. Profits made from more profitable segments compensated losses made in other segments, which the provider was required to operate in as part of its obligations under the universal service arrangement.

Cream skimming

“After the market was opened to competition, the new participants (when there were any) concentrated on the profitable segments, leaving the non-profitable segments to the universal service provider,” explained Axel Gautier, a lecturer in industrial organization at the HEC-ULg Management School. “This phenomenon,  known as cream-skimming (or cherry picking), is capable of ruining the financing arrangements for the universal service provider.”

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