Executive Summary

The Advisory Panel was asked by the Minister and the Government of Canada to offer analysis, recommendations and advice that would ensure Canada Post’s long-term capacity to achieve and retain financial self-sustainability and maintain universal postal service – in an evolving postal world that has been made more competitive and challenging as a result of technological change and globalization.

Over the course of the strategic review, the Advisory Panel became concerned that:

1. Canadians are generally of the opinion that Canada Post is profitable and financially sound, whereas it is apparent to the Advisory Panel that Canada Post’s financial sustainability is uncertain at best;
2. Canada Post’s plants and facilities are in urgent need of upgrading and modernization as a result of inadequate capital investment over the past several years;
3. There is misunderstanding and misconception at Canada Post and in the government about Canada Post’s core responsibilities and the government’s concrete postal expectations, particularly in key areas like the universal service obligation and rural mail services; and
4. The roles, responsibilities and authority of the Government of Canada, as shareholder, the corporation’s Board of Directors, and Canada Post management need clarification and must be better understood by all involved.

These realities present a pressing need for postal policy action, as they combine to limit Canada Post’s capacity to continue to deliver a universal postal service of a quality and at price levels that Canadians expect and deserve. This is a situation made more urgent by the recent economic and financial downturn.

The Advisory Panel aims to contribute constructively to the ongoing evolution of Canada Post by making recommendations and by providing advice to ensure that Canada Post has the corporate and commercial capacity it needs to maintain its financial self-sustainability, while presenting new ways and approaches for the shareholder (the government) to articulate and communicate its public policy expectations of Canada Post.

This report is constructed as follows:  

Part I: The Postal World in the 21st Century

Developments in the modern postal market

The postal market is undergoing far-reaching changes under the influences of changing technology, globalization and liberalization. There are three parts to the modern postal condition. First, the traditional lettermail market is a mature industry, one that has likely peaked. The prospects for this sector are steady-state at best; a slow but steady decline is likely. The pace at which electronic substitution is taking place has varied from country to country and sector to sector, and has not, perhaps, evolved at as fast a pace as had been predicted. But the fact is that electronic substitution has taken away a significant part of the mail sector and promises to continue to do so in the future. Second, the new economy and the rise of the service sector offer a kind of counter-balance to the stagnating letter market. E-commerce presents growth opportunities for packets and small parcels, and the service economy presents similar opportunities in the courier and express markets. Third, our society is increasingly a communications society, and physical communication will continue to play a role even as electronic communication expands. The lettermail market – the traditional protected market for Canada Post – is not doomed to oblivion but is changing and becoming more challenging.

What we heard from Canadians

Canadians remain deeply interested in postal matters and intensely committed to the maintenance of a viable and effective universal postal service. There appears to be little public support for the privatization or deregulation of Canada Post, and considerable if not unanimous support for maintaining a quality, affordable universal service for all Canadians and communities. Most of the submissions we received do not support deregulation of the postal service – that is, they do not support removing Canada Post’s monopoly over letters (the exclusive privilege).

Many individual Canadians generally feel that postal rates are moderate. Businesses that use Canada Post generally look to lower prices and fewer price increases. But some firms report that they feel that the price level is reasonable for the service received. The postal service is particularly important to small and medium-sized enterprises (SMEs) ¹, which see the postal service as a cost-effective way to enter new markets. That said, the Advisory Panel heard a number of concerns about Canada Post’s lack of attention to the needs of SMEs relative to the attention given to large users. Some larger firms also noted that price increases give incentives to e-substitution and looked for volume discounts, particularly in emerging e-sectors. They also expressed a desire for better partnerships, volume discounts and work-sharing incentives.

While some business clients expressed concern that Canada Post has too much independent authority to set prices for everything other than the basic lettermail rate, there were mixed sentiments about creating a third-party regulator.

Nowhere does the postal service evoke more public discussion and emotion than in rural Canada. Rural Canadians are deeply anxious about any weakening of Canada Post, which they equate with the reduction or loss of viable postal service in rural areas. Indeed, the Advisory Panel heard that rural Canadians maintain that the post is their only consistent and reliable means of communication. The Advisory Panel also heard that rural Canada’s confidence in Canada Post as a federal institution has been shaken by the perceived reduction in its rural services and by post office closures despite the moratorium, and what are seen by some to be unreasonably strict applications of labour and safety codes.  

What we learned from other posts

The Advisory Panel examined the experiences of a number of posts around the world. Like Canada Post, they have struggled with the challenge of declining revenues and increasing costs.

On the revenue front, all national posts reviewed have experienced weakening or flattening of mail growth (and some actual declines) as a result of electronic and product substitution, as well as from increasing competition, particularly where postal markets have been deregulated. On the cost front, all national posts experienced a general trend of costs increasing faster than revenues, whether in the form of rising labour costs or in the struggle to deal with all the costs of providing the various dimensions of the universal service. To counter these trends, national posts have leveraged their networks, introduced complementary products and services, established new networks and extended ones through subsidiaries and acquisitions, and generally integrated their operations vertically and horizontally in order to generate more revenues to support their universal service obligations.

Moreover, posts that have modernized their plants and operations have been able to reduce costs and generate new revenue sources by offering an increased variety of innovative products and services to their customers.

Successful national posts operate in well-constructed governance arrangements that simultaneously encourage modern business practices and attention to public needs. They have a clear, transparent and accountable governance arrangement that encourages the simultaneous and balanced attainment of commercial and social goals, without too much government control inhibiting the attainment of one or the other objective.  

The view from Canada Post

Notwithstanding the fact that it has made a profit in 13 consecutive years, the Canada Post segment of Canada Post Corporation - the post office – is in a financially precarious position. Canada Post Corporation’s existing level of profits is derived primarily from its Purolator subsidiary. The Canada Post segment itself is barely breaking even.

The revenues from Canada Post’s reserved market (the exclusive privilege) are under significant pressure from a number of sources. As is widely appreciated, lettermail volumes are flat or in decline – Canada Post anticipates at least a 1% annual decline in volumes over the next five years. The costs of delivering the mail are rising at an accelerating pace. Over and above the impact of rising transportation and labour costs, demographic changes produce approximately 200 000 new postal addresses a year, with the net result that, on average, there are fewer pieces of mail going into each mailbox.

CPC identifies three further structural constraints on its capacity to be financially self-sustainable: obsolescence and inadequate modernization as evidenced by aging plants and equipment, delivery and retail networks that do not reflect the demographic changes of the last two decades, and an inhibiting internal culture, including rigid collective agreements with CUPW and the governance arrangements within which Canada Post operates.  

In its submission to the Advisory Panel , Canada Post suggests a variety of measures to help keep it financially self-sustaining, including:

• Compensation at market levels and on commercial terms for any postal-related public policy services it undertakes;
• The adoption of a proximity-based standard of service and a clear definition of rural and urban communities;
• Pricing flexibilities and increased borrowing limits to meet its current and ongoing investment and operational needs;
• Third-party review of the CUPW agreement and a public report on its competitiveness; and
• Clarification of the role of the corporation’s Board of Directors.  

Part II: Critical Issues For Canada Post

Five overarching themes commanded the Advisory Panel ’s attention through the strategic review.

Universal service obligation (USO)

When the Post Office Department was transformed into a Crown corporation in 1981, the definition of the USO was left vague. Canada Post was expected to provide a basic and customary service that would meet the needs of the people of Canada, and provide comparable levels of service in communities of the same size. Today, the lack of clarity around what is, should be, might be, or could be included in Canada Post’s USO is creating confusion for Canada Post, its shareholders and its customers.

To clarify the USO – which lies at the heart of Canada Post’s purpose – the Advisory Panel suggests that it should be defined in a ‘contract’ or ‘service charter’ between the Government of Canada and Canada Post, and made public. This service charter would become one part of a new financial and service framework that would clearly set out the government’s expectations of Canada Post.

As a general principle, the Advisory Panel would suggest that as a commercial Crown corporation, Canada Post should expect to be reasonably compensated by the government for any public policy obligations the government assigns to it beyond its universal service obligation.

Modernization (physical capacity and capability)

Canada Post must have adequate tools and processes to carry out its required functions and responsibilities, in terms of efficiency, cost, and timeliness and accuracy of service. In the view of the Advisory Panel , it appears that Canada Post has significantly under-invested in its infrastructure, both in terms of dealing with obsolescence issues and keeping its plant and equipment current. This will take a significant level of investment to address. One could reasonably expect that investment to be in the order of $3 billion over the next seven years in addition to the $200 million annually, on average, that it is currently spending for ongoing maintenance and normal infrastructure programs.

A principled approach to implementing Canada Post’s multi-billion dollar modernization plan requires a significant commitment to productivity improvement through infrastructure modernization. This will inevitably impact the nature of jobs at Canada Post – and this must be made clear, and communicated to all parties as part of the approval requirements to proceed with modernization programs. The Advisory Panel finds merit in Canada Post’s suggestion for a third-party review of current labour arrangements from the perspective of their possible impediments to, or benefits contributing to, the long-term sustainability of Canada Post.

Financial sustainability

If Canada Post is unable to generate and access the necessary funds over the long term, its ability to consistently deliver on its universal service obligations will be increasingly threatened. It has recently been underperforming against the financial targets set for it in the 1998 Multi-Year Financial and Policy Framework. This reflects a divergence in the recent growth rates in its operating costs on the one hand (up 3.2% in 2007) and its revenues on the other (up 2.5% in 2007). Canada Post’s future financial sustainability is directly linked to the extent to which Canada Post can access capital to finance its modernization plans, successfully leverage modernization to reduce operating expenditures through productivity improvements and grow its revenues.

The government should set new financial self-sustainability targets for Canada Post that are appropriate to changing circumstances. It should also construct a revised Financial Framework with updated target ratios for its capital structure, profitability and dividends. This Framework should provide financial targets which, when achieved and coupled with the appropriate price-setting regime, will enable Canada Post to operate on a financially self-sustaining basis. Management of the Financial Framework should be part of the annual budget and strategic corporate planning process.

Postal services in rural Canada

It is the Advisory Panel ’s view that the maintenance of an effective postal service in rural Canada is part of Canada Post’s universal service obligation and should not be conceptualized as a public policy objective beyond the USO. Neither Canada Post nor the Government of Canada has agreed on a thorough operational and mutual understanding of the rural services dimension of Canada Post’s USO. The Advisory Panel believes that the formulation, articulation and communication of a clear and transparent understanding of Canada Post’s roles and responsibilities in rural Canada through a redefined USO would remove a considerable amount of friction and potential for future misunderstandings between all parties concerned.

Post offices in rural areas are important for a community’s economic viability and social identity. However, many of the existing rural corporate post offices were established in conditions very different from the present. A review of the moratorium on rural post office closures is overdue. A new and more explicit mechanism should be developed to replace the moratorium with a clear set of rules and procedural guidelines that would both safeguard and respect the postal service needs of rural Canada but also allow Canada Post a degree of flexibility to deal with emergent issues in providing postal services in rural areas while respecting the service needs and expectations of rural Canadians.

Mail delivery to the end-of-lane – basically to a roadside box at the end of a property owner’s lane or driveway – has its origins at the turn of the 20th century. In many areas, these houses were once on quiet country roads. Now, these same residences are directly adjacent to relatively busy streets and highways, where there is a serious and likely potential for accidents and injury both to the people delivering the mail and to passing motorists. The Advisory Panel believes that the safety reviews undertaken by Canada Post were necessary and likely overdue, given the changes in traffic speed and road usage that have evolved over time. The government should permit Canada Post the latitude to give serious consideration to the efficacy and viability of maintaining this mode of mail delivery. Canada Post’s community engagement process should be enhanced to review current services and consider whether alternative and acceptable approaches could be devised for the communities involved.  

A clarified governance environment

Canada Post suggests that government oversight is out of proportion to requirements, with the result that approvals of corporate plans, certain commercial transactions and borrowing can be very lengthy, and market opportunities can be lost while these oversight processes unfold. On the other hand, the Advisory Panel notes that the government has a duty to ensure that Crown institutions, such as Canada Post, are well-managed and fulfill their public policy purposes in a fiscally responsible manner. Given Canada Post’s evolution the Advisory Panel believes it would be timely to stand back and clarify again the various roles, responsibilities and authority of the key agents in the Canadian postal governance environment. The ingredients of an ideal governance regime would include:

• Making specific, clear and transparent the roles, responsibilities and authority of Canada Post’s management, its Board of Directors and the Government of Canada;
• Vesting authority for primary due diligence, financial/commercial responsibility and recruitment of senior management with an autonomous board, separate and at arm’s length from government. This board would predominantly be composed of individuals with extensive and intensive commercial expertise and experience, as well as experience in the public sector environment;
• Enable the shareholder to exert a practical degree of financial oversight through a number of actions, including issuing a clear policy statement about what it wants and expects; appointing the Board Chair and (with the assistance of recommendations from the Board) of Board members; having a shareholder representative of some sort on the Board; establishing a clear and concrete relationship between the shareholder and the Board, including scheduling regular meetings between the Board and the Minister and outlining a clear articulation of expectations; and conducting an annual review of multi-year corporate plans and financial targets;
• Stating clearly and publicly the quality, service and USO expectations. This would be done within a contract arrangement, to be overseen by the Board of Directors; and
• Canada Post would be compensated by the government for any non-commercial activities outside the USO contract it was required by the government to undertake.  

Part III: Summary of the Recommendations

The Advisory Panel’s recommendations, which are fully detailed in Part III of this report, are clustered around the five major themes:

Universal service obligation

The USO principles should be set out in a Service Charter – a contract between the Government of Canada and Canada Post, to be monitored by the Board of Directors of Canada Post and implemented by its management.

Public policy objectives that are not part of the USO should not be paid for by Canada Post out of its general revenues.  

Modernization

Canada Post must have a modern postal network and up-to-date  technology and competitive processes and products if it is to fulfill its USO commitments in a financially self-sustaining way.

Canada Post’s Board of Directors should fully develop and present its multi-year modernization plan to the government for approval along with its 2010-2014 corporate plan, and update the plan in each subsequent corporate plan.

The government should proactively support Canada Post’s pursuit of the modernization plan, with respect to the opportunities provided to improve productivity and to reduce costs occasioned by retirements and other attrition over the period of the modernization plan and beyond.

Canada Post should have access to levels of capital borrowing appropriate to the financial plan and its modernization plan.  

Financial sustainability

The 1998 Policy and Financial Framework should be reformulated in light of contemporary conditions and requirements. The revised Framework would have two elements – a Service Charter as previously noted and financial targets discussed below.

The Financial Framework should set targets that are appropriate to present and future conditions and challenges and that establish Canada Post’s long-term financial self-sustainability. The targets in the Financial Framework should be determined to allow Canada Post to access capital and debt markets to the level required to finance the modernization plan.

The Financial Framework should establish a pricing regime for Canada Post’s regulated products that reflects their costs and ensures the revenue flow and level of profitability required to support self-sustainability, while ensuring reasonable postal rates for Canadians. The requirement for Canada Post to pay dividends should be relaxed during the intensive investment phase of the modernization plan. The government should clarify Canada Post’s pension solvency requirements to ensure that this does not impede the capital cash flows required to finance modernization.

Canada Post should continue to function commercially in those competitive markets in which it currently operates, and the government should clarify and communicate its expectations involving any new commercial initiatives.

Deregulation of the postal market or exclusive privilege should not be pursued, save in the area of outbound international mail.  

Postal services in rural Canada

The government should replace the moratorium on rural post office closings with a new approach founded on a more realistic and practical definition of ‘rural’ and in the context of an updated and more operational rural policy.

The government should declare that the rural post is part of the USO, and service expectations for rural Canada should be incorporated into the new Service Charter.  

A clarified governance environment

The respective roles, responsibilities and authority of the Board of Directors, management and the government should be updated, clarified, communicated, made transparent, and regular and improved communication should be established:

• As a guiding principle, and given Canada Post’s unique character and its largely commercial operating environment, the Advisory Panel strongly believes that oversight of the corporation’s business should rest primarily with the Board of Directors;
• The Board of Directors’ responsibility for the corporate viability of Canada Post should be clarified and operationalized through an improved appointments process including the appointment of a current or former deputy minister or associate deputy minister to the Board;
• The process for approving regulated prices should be enhanced and made more transparent;
• A greater symmetry of postal intelligence and knowledge should be established between Canada Post and the government department with portfolio responsibility for Canada Post; and
• A strategic review of Canada Post should be carried out every five years.  

In the longer term, to further enhance clarity of responsibilities, the government’s financial and regulatory oversight responsibilities should be separated with an appropriate governance structure and process put into place that attends to both functions.

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Executive Summary:  Footnotes

^[1] Please refer to Appendix F for a glossary of acronyms

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