In this section, the Advisory Panel reviews and analyzes the modern postal world in which Canada Post functions. The Terms of Reference of the strategic review asked the Advisory Panel to:

• Analyze how changes in technology, competition and customer demographics have shaped the postal market;
• Analyze the evolution of the markets for lettermail, parcels, advertising mail and international mail;
• Present the emerging needs of postal service customers; and
• Present what can be learned from these same developments in the postal services markets in other countries.  

This section contains five parts. In the first part, the Advisory Panel presents a brief sketch of its understanding of the latest developments in the postal markets in Canada and around the world. The second part presents what we heard from Canadians about postal matters. In the third part, the Advisory Panel presents and analyzes a number of interesting postal developments in Austria, Australia, New Zealand, Sweden, the United States and the United Kingdom. The fourth section presents our understanding of Canada Post’s analysis of the postal world and its views of what it requires to be successful and effective in that world. In the fifth and concluding part, the Advisory Panel draws its conclusions and presents five critical themes or issues that it feels should shape its further analysis and recommendations.

I – Developments in the modern postal market

The postal market, like all sectors of the economy, 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 and likely, a slow but steady decline. 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. There are opportunities in the admail market and physical communication in areas where the physical has a comparative advantage over electronic communication, such as in the delivery of promotional material. The modern postal market, then, presents a shifting product mix.

The experience of the past decade suggests that the market for traditional mail is weakening if not stagnating. This has enormous consequences for posts, as lettermail has traditionally been the bread and butter of postal revenues, underpinning posts’ financial capacity to deliver their universal service obligation. To the extent that lettermail volumes weaken, posts have to find alternate sources of revenue; if not, service levels, quality and the nature of the USO itself will likely decline as a result of the posts’ diminishing capacity to pay the costs of existing service levels.  

From the telegraph and the telephone to fax machines, e-mail and the Internet, lettermail has sequentially confronted waves of new technological and communications developments that have threatened its existence. The contemporary communications market offers a variety of possibilities: the cellphone and text messaging; the fax machine and electronic scanning; e-mail, ATM machines and direct debit; and various forms of electronic document transfer.

The advent of electronic communication is particularly consequential in view of the fact that most mail now is business mail. Personal mail (consumer-to-consumer mail) typically represents 10% or less of most mail markets across the industrial world. Typically, 80-90% of mail either originates with, or is destined for, business. Canada Post reports that business mailers account for more than 90% of its lettermail and admail volumes. Much of this takes the form of massive volumes of bill presentment and payment, which is easily transferable to electronic form. 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 eaten away at large parts of the mail sector and promises to continue to do so in the future. There are parallel developments – such as bundling of bills across services into one bill – that diminish volumes as well.  

According to a Nanos Poll commissioned by Canada Post, 60% of Canadians believe that they will be sending about the same amount of mail as at present five years from now, and 56% expect they will be receiving the same amount of mail. Young Canadians were much more likely to say that they would be receiving more mail (33%) in the next five years. However, 46% of those polled believed that the Internet was a major threat to Canada Post, while 33% saw it as a minor threat. The Canadian Federation of Independent Business (CFIB) reports that overall its members anticipate that they will be generating lower volumes in the next five years, a view expressed in consultations with larger customers as well. In interviews with the Advisory Panel,  national bank representatives anticipated a 2-3% annual decline in mail. The National Association of Major Mail Users (NAMMU) estimates that mail volumes will stagnate or erode.

These developments appear to have longevity and depth in their impact, so one would not over-generalize in suggesting that lettermail is a mature industry, one that has peaked in its development and that is unlikely to grow at any pace in the future.  

Part of the challenge in assessing the impact of electronic substitution is the fact that there is a second factor that has impacted domestic mail volumes. The postal world is part of the larger physical communications world, which has been internationalized and globalized to a tremendous extent. This reflects the postwar liberalization of trade and the growing importance of trade in services. As national barriers disappeared and internal markets were deregulated and liberalized, there was a rapid growth in cross-border trade and communications. Large international firms developed and entered into almost every domestic market in the world. This development has included private multinational corporations like UPS and FedEx, which function in every market in the world. But this development also includes a more recent phenomenon – the growth of international posts themselves. Most major industrial posts function and compete in each other’s markets, and a number of them are quite large and imposing. The German post has transformed itself into DHL, and the Dutch post has transformed itself into TNT – major players that compete and rival FedEx and UPS in every market in the world, including Canada. The liberalization and internationalization of the postal world has had a serious impact on domestic postal markets by encouraging the development and extension of serious rivals.  

That said, recent trends are uneven. The Universal Postal Union (UPU) – the United Nations international agency for the postal sector – reports that over 430 billion pieces of mail are sent around the world each year. This represents the delivery of well over one billion pieces of mail a day, and the figure does not include parcels, courier and express deliveries and so on. This is a formidable volume. At the same time, the world trend in the first half-decade of the 21st century saw volumes decrease by 0.3% per year. Within this world trend, there are differing trends, even within the industrial world. There has been some volume growth in Europe, although this slowed to negative 0.7% in 2006, and there has been slow to stagnating growth in Luxembourg, Sweden, The Netherlands and the U.K., which anticipates volume losses of up to 3% in the near future. Recently, letter growth has stagnated, stopped, or even declined slightly in Australia, New Zealand, the United States and Canada.

The posts themselves have been aware of these trends and have tried to mitigate them by expanding their efforts into related postal or physical communications markets – markets where they do not enjoy the monopoly status that they had with lettermail. These areas have included parcels, express and courier products, direct marketing and admail and financial services. E-commerce has generated tremendous demand for parcel delivery. Physical admail may benefit and grow as a result of the recent limit on telemarketing (the Do Not Call Registry). Indeed, many posts in the world have evolved such that lettermail revenue accounts for less than half of total revenues (Germany 21%; Switzerland 39%; The Netherlands 40%; Norway 42%). Transaction mail represented 54% of Canada Post’s unconsolidated revenue in 2007.

It must be reiterated, though, that these alternate postal activities take place in a highly competitive environment, where posts do not dominate the market and where economic activity will weaken significantly in the wake of the financial and economic downturn. For example, direct marketing has been a good growth area for posts, particularly given the steady growth of advertising budgets. But physical communication is but one tactic or tool open to advertisers and marketers, and direct mail competes with newspapers and other delivery modes in the physical side of this market. The express delivery and courier market is lucrative and expands quickly along with economic development and growth – but it is also a very highly competitive sector. The parcel industry had demonstrated a steady revival, particularly as a result of the lively development of e-commerce over the Internet, which requires products to be delivered. But again, the parcel delivery industry is highly competitive. The provision of financial services accounts for a substantial economic line of business, but this activity is often off-limits to posts that have no historical tradition in this market and/or where there is a fully developed financial sector.

In general, these efforts at diversification see national postal companies competing both with private companies in non-reserve markets and against other national posts as the larger and more ambitious posts work to establish an international network and brand in the globalized economy. In order to be competitive and successful, the posts have to respond quickly and effectively to consumers’ needs and expectations. This has required posts to become more commercial, more nimble, more responsive and more competitive if they are to be successful in these markets and generate additional revenues to neutralize the decline in lettermail income.  

Is the lettermail market in Canada doomed to oblivion? It is highly unlikely that a sector that at present handles almost 5.5 billion units a year is going to soon disappear. A recent study sponsored by the Envelope Manufacturers Association’s Institute for Postal Studies (IPS) estimated that the value of Canada’s mailing industry was $74 billion in 2005. Indeed, there is some sense that lettermail has a reasonable if not vital future. The impact of electronic substitution has been uneven, which reflects consumer preferences and product availability. For example, in areas where broadband access is limited – rural areas, for example – electronic substitution is moderate. Moreover, a recent survey by BrandTrust found that 85% of Canadians with access to e-mail preferred to receive their bills, bank statements and financial reports through regular mail. This in turn reflects, in part, that consumers trust the mail and value its security and protection against fraud and identity theft. The study found that 81% of Canadians believed that regular mail was more secure than e-mail. (The comparable figures in the United States were 86% and 76%.) Surveys indicate that posts have an enormous ‘brand identity,’ one based both on familiarity and reliability as well as on the trust and loyalty generated by long-term relations.  

The posts and lettermail remain attractive to customers for a variety of reasons. These include the fact that they offer an effective universal coverage and accessibility, the postal network having a presence in all communities and neighbourhoods and delivering to each door and address in a country. The ‘physical’ dimension of the mail is another potential comparative advantage. Mail is mobile and can be read anywhere and at any time. It has the capacity to be used in conjunction with the new technologies in a complementary way, and parcel delivery is an accelerating offshoot of the development of Internet commerce. And, its very physical dimension offers possibilities in direct mail and other markets, given its potential for shape, tactile features, mode of response and flexibility.

To sum up this discussion: The postal market is changing. The lettermail market – the traditional protected markets for posts – has matured, possibly stabilized, and is likely stagnating or declining slowly. This is counterbalanced to some extent by growth possibilities in small parcels, courier and express, and admail – all highly competitive markets. The postal market, therefore, presents a changing mix and a changing range of competitive opportunities for posts.

II – What we heard from Canadians

Notwithstanding assertions about the dominance of electronic media and communications, Canadians remain deeply interested in postal matters and intensely committed to the maintenance of a viable and effective universal postal service. The Advisory Panel heard from Canadians in many formats – through formal written submissions and e‑mails, through organized resolutions from municipal councils, and through interviews, meetings and consultations with various groups and organizations. As appendices C and D indicate, the Advisory Panel connected directly with thousands of Canadians and dozens of organizations and groups. The latter included trade associations and social groups, charities and publishers, postal competitors and rural groups, interest groups and unions, and small, medium and large customers of Canada Post.

As an introductory generalization, there appears to be little to no public support for the privatization or deregulation of Canada Post at this time, and considerable if not unanimous support for the maintenance of a quality, affordable universal service for all Canadians and communities. Indeed, the two public positions seem to be inextricably linked.  

However, the Advisory Panel noted that there is little knowledge about, or public understanding of, the realities facing Canada Post. Most Canadians do not have a deep appreciation of the complexities involved in providing this universal service. Nor do they have a sure grasp of the compelling operational and financial challenges that make Canada Post’s future capacity and viability so precarious. Indeed, the Advisory Panel was struck by the extent to which Canadians felt that Canada Post was a prosperous company, with ample capacity to expand services and increase quality without consequence for the financial viability of the corporation. This likely reflects the fact that the Canada Post Group of Companies (which includes Canada Post Corporation) has annually declared itself to be profitable over the last 13 consecutive years and has been issuing dividends to the government. The Advisory Panel ’s assessment is that this has contributed to Canadians’ lack of full awareness about the true financial condition and capacity of Canada Post Corporation.

What follows in this section is a report of what we heard from Canadians over the course of the strategic review. This report is not based on a scientific sample, but rather, reflects a snapshot of Canadian opinions provided by those Canadians who chose to participate in the strategic review process. In our review of submissions from individual Canadians, the top themes or issues are starred (*).

* Public opinion: Maintain Canada Post as a Crown corporation, with exclusive privilege

Our experience throughout the review suggests support for Canada Post and for the universal postal service. Some of the survey results cited below were part of submissions made to the Advisory Panel, while other observations are based on our analysis of Canadians’ input to the Advisory Panel.

In their submissions to the Advisory Panel, the vast proportion of individual Canadians maintained that postal services remain an important public service. This view was especially prevalent in submissions from rural Canada.

This view extended to whether Canada Post should retain its monopoly over letters (the exclusive privilege), where it was widely felt that only a single national company can provide universal service at a universal price to all Canadians. The Canadian Federation of Independent Business (CFIB) canvassed its membership on this point in 1996 and in 2008 – and support for Canada Post retaining the exclusive privilege rose from 32% to 52%.

An Ipsos-Reid poll (cited in the CUPW submission) demonstrated that 69% of Canadians oppose allowing private companies to deliver mail. And 44% of those who did support allowing competition would change their mind if this resulted in the elimination of a one-price system for letters anywhere in Canada. The vast proportion of submissions to the strategic review demonstrated strong support for the view that Canada Post should retain the exclusive privilege, a point raised in 46% of individual submissions to the Advisory Panel. There is a widespread public view that a universal service at a universal price is one of the best things about Canada Post.

Bill C-14 was raising controversy at the outset of the strategic review process. This Bill proposed to deregulate outgoing international mail – that is, it would have allowed private companies to continue to compete with Canada Post to collect and deliver mail that was destined for international points. This Bill died on the Order Paper when Parliament was dissolved in September 2008. A number of groups opposed Bill C-14 and insisted that Canada Post should maintain its monopoly in this area. They were apprehensive that this Bill would weaken Canada Post financially, thereby threatening its capacity to provide universal service. However, a number of groups supported Bill C-14, not surprisingly led by ‘remailers’ in the Canadian International Mail Association (CIMA) and elements of the printing sector including CPIA (Canadian Printing Industries Association). NAMMU reported to the Advisory Panel that its membership was divided on this issue.  

Canada Post enjoys strong and positive brand recognition. A Nanos poll (commissioned by Canada Post) reported that nearly nine out of 10 Canadians had a favourable or somewhat favourable impression of Canada Post, and seven out of 10 were satisfied overall with Canada Post. This survey result confirms a number of external evaluations of Canada Post, which is recognized as a top 100 employer in Canada by Maclean’s magazine and which is the most trusted federal institution in Canada, ranking ahead of the military, the Supreme Court, the RCMP and the CBC^{[ 1 ]}. Léger Marketing reports that Canada Post ranks third among the 150 most-admired businesses in Quebec. Finally, the Nanos poll also reports that Canada Post has a higher favourability rating among Canadians than UPS, FedEx or
Bell Canada Enterprises (BCE).

During the strategic review process, the Advisory Panel heard a general refrain emanating from individual Canadians: “Do not fix what is not broken.” The view was expressed that privatization and deregulation of postal services in other countries has not been successful and that Canada should not experiment with other options or alternatives when the present approach is working.

* Reliability, security and privacy

One of the strongest reasons why Canadians support Canada Post and the existing postal regime is because they trust Canada Post to be reliable and to guarantee security and privacy in their communications, a point that was raised in many submissions. The financial institutions are particularly interested in the security of their communications, as are companies that send out invoices, statements, accounts and so on. There has also been considerable backlash over intrusive e-technologies, which has culminated in the advent of the national Do Not Call Registry in Canada and in other countries.

According to studies by BrandTrust, the majority of Canadians consider physical mail more secure and reliable than e-mail, and are more confident in receiving sensitive information and documentation in this way. The BrandTrust studies indicate that 85% of Canadians prefer a physical format for their financial documents (bills, financial reports and bank statements), and 81% believe that regular mail is more secure than e-mail. Furthermore well over half of Canadians (63%) still prefer receiving information from businesses they use via regular mail versus e-mail.

* Pricing

Based on submissions received during the strategic review, individual Canadians generally feel that postal rates are moderate. Not surprisingly, businesses that use Canada Post generally look to lower prices and fewer price increases. But many firms report that they feel that the price level is reasonable for the service received.

Many submissions from individual Canadians noted that Canada Post has one of the lowest letter rates in the world for lettermail. This reflected the fact that postage rates have risen by only two-thirds the increase in the Consumer Price Index (CPI), a price cap formula adopted when the government established a policy and financial framework for Canada Post in the late 1990s.

The Nanos poll referred to earlier reported that 62% of Canadians were satisfied with the value that they received for the cost of a stamp. Indeed, when asked what CPC should do to maintain a universal service in the face of declining volumes, raising the price of a stamp was individual Canadians’ preferred tactic. The least preferred tactics were closing post offices and reducing the number of processing plants. Generally, Canadians feel that Canada Post’s exclusive privilege has helped to keep postal rates low. At the same time, the ‘one price fits all’ pricing for letters is very popular among Canadians, as a key component of the universal service.

Some business clients expressed concern that Canada Post has too much independent authority to set prices for everything other than the basic lettermail rate. Many small and medium-sized enterprises (SMEs) reported that they feel that CPC should not have unilateral authority to raise prices. They reported various cases and issues where they felt harmed by Canada Post’s pricing decisions, which they felt were poorly explained and timed, or not adequately justified, and presented in such a way as to leave no room for negotiation. Some feel that there should be increased and independent oversight and accountability in pricing decisions.

But there are mixed feelings about creating a third-party regulator. Less than half of the CFIB’s membership supported this, and NAMMU does not support the approach, because of the costs involved and the fear of creating another level of bureaucracy. NAMMU suggested to the Advisory Panel the use of the existing ombudsman or the creation of new bodies, such as a mailers’ advisory committee, to provide mailers with recourse regarding pricing.   

Large firms – NAMMU and Magazines Canada, among others – expressed concern about the lack of timeliness and consultation in price setting, the absence of price accountability, the need for price caps even on non-letter products, the need for better partnerships, volume discounts, work-sharing incentives, and the need for an appeal mechanism.

* Finance

As noted earlier, many Canadians who participated in the strategic review appear to believe that Canada Post is a healthy, financially viable and even lucrative business.

The Panel found that in general, Canadians are not widely supportive of asking Canada Post to provide dividends to the government. According to the Nanos poll cited earlier, using earnings from Canada Post to pay for facility and equipment upgrades was the most-supported option among Canadians (43%). One Canadian in three (31%) supported paying for upgrades with a subsidy from the government, while 21% supported paying for upgrades with private sector financing. Five per cent of Canadians were unsure. CUPW reports that in 2006-07, over 500 municipalities passed a resolution asking the government to stop requiring Canada Post to make profits and issue dividends. Some groups, notably the Canadian Labour Congress, expressed the opinion that Canada Post’s focus on financial returns has been detrimental to maintaining and improving postal service, universality and accessibility.

* Rural

Nowhere does the postal service evoke more public discussion and emotion than in rural Canada. There is a widespread view in rural Canada that postal service in rural areas should be comparable to what is available in cities. This issue was raised in almost half of the individual submissions to the Advisory Panel . Indeed, many in rural Canada – the National Farmers Union, for example – see postal services as a right. In fact, the Rural and Cooperatives Secretariats at Agriculture and Agri-Food Canada recommend the creation of a rural advisory committee and a rural postal services report card to provide a rural voice at Canada Post.

The National Anti-Poverty Organization (NAPO) spoke for many rural Canadians when it suggested that any weakening of Canada Post would result in the reduction or loss of viable postal service in rural areas. Indeed, rural Canadians maintain that the only consistent and reliable means of communication is Canada Post, particularly among rural Canadians.

 

This is accentuated by the fact that Internet use and high-speed access in rural areas are far below the national average. Rural Canadians prefer Canada Post as the primary provider of information, a view expressed by the Rural and Cooperatives Secretariats. Moreover, the postal service in rural areas is seen as an important supporter and promoter of competitive business activity and an employment provider, particularly for rural women. And the post office is often the only remaining government or organizational presence in some communities.

The Advisory Panel is of the opinion that rural Canada’s confidence in Canada Post as a federal institution, has been shaken by the perceived reduction in its rural services, and post office closures, despite the moratorium, and what are seen by some to be unreasonably strict application of labour and safety codes.

Economic, cultural and national development

Many Canadians suggest that Canada Post and the universal service obligation play an important role in fostering Canada’s social and economic network and development. This is seen as being particularly true for small companies and the self-employed in smaller and remote communities. Canada Post serves to tie together vast areas of Canada, providing communications to those with disabilities or without access to high-tech communications and helping maintain Canada’s cultural identity by supporting specialized publications ^{[ 2 ]}. As noted by CUPW, Canada Post continues to be an economic and cultural lifeline for citizens and businesses that continue to depend on postal services for information, financial transactions and the delivery of supplies and products.

In a broader sense, the Conference Board of Canada estimates that Canada Post’s expenditures and investments create some 45 000 indirect jobs.

CUPW and the Public Service Alliance of Canada (PSAC) stated that there appeared to be some public support for Canada Post to continue providing postal support for publications mail, community newspapers, the Food Mail Program and so on, and perhaps expanding this support generally to non-profit organizations, as well as door-to-door service for the disabled and seniors. However, some observers, such as NAMMU, expressed the view that the costs of these public policies should be borne not by general postal users through stamp prices, but by the taxpayer through direct government support.

Small and medium-sized enterprises (SMEs)

The Advisory Panel interviewed a number of small and medium-sized business customers. The postal service is particularly important to SMEs, which see the postal service as a cost-effective way to enter and access new markets. This is especially true in the emerging e-commerce sector as well as in rural Canada, where a high proportion of Canada’s self-employed live.

Many of the SMEs interviewed have long relationships with Canada Post and are, for the most part, satisfied with the service it provides. In many cases, Canada Post is critical to their business, as only CPC guarantees universal delivery and offers particularly good delivery and service in rural areas. Indeed, many postal observers and studies suggest that the future of posts lies in nurturing relationships and generating business with SMEs.

That said, the Advisory Panel heard a number of concerns about Canada Post’s lack of attention to the needs of SMEs. SMEs are very price-sensitive and they reported concern about relentless, non-negotiable, and sometimes inexplicable price increases, which their customers complain about when passed on to them. SMEs also report that they are receiving ‘enhanced’ service at higher prices, when they actually do not need the enhancements and would far prefer lower prices. A persistent refrain was that Canada Post paid insufficient attention to their needs, relative to the attention given to large users (which were seen to get better service and lower prices). Some had concluded that Canada Post did not actually want their business. The view was that Canada Post needed to be less bureaucratic and to have greater continuity of personnel and service, including a key contact with authority to make arrangements. Some observers proposed the creation of some sort of SME office at Canada Post.  

Some concern was also expressed that Canada Post might be competing unfairly in competitive markets outside of the core postal business, for example in printing admail for delivery. As Canada Post seeks to increase its revenues to pay for its USO obligations, it may look to complementary activities – such as helping companies devise and execute marketing and advertising plans, including the printing and delivery of materials. This was a point raised intensely by the Canadian Community Newspaper Association (CCNA), whose members compete with Canada Post in the delivery of advertising mail.

Large customers

The Advisory Panel interviewed a number of Canada Post’s large customers, including financial institutions. The Advisory Panel heard many positive comments about service, reliability, universality (access to rural Canada is important), value, and so on. There is a sense that Canada Post is becoming far more proactive in developing business partnerships with its large customers and that relationships are both positive and improving.

However, a prevalent issue in this sector is the future of physical communication, and the possibility of mass migration of bills and payments to electronic platforms. The message was that if Canada Post is to continue to be present and relevant in this sector, it would have to provide excellent and improved service, for example by reducing the number of lost statements and bills, providing better service standards for returned mail and making sure that interactions with customers were far less bureaucratic, perhaps by better communication and by giving personnel at the ground level more authority.

While there was an appreciation that CPC’s prices provide reasonable value, large customers noted that price increases give incentives to e-substitution. Companies in this sector, as elsewhere, looked for volume discounts, particularly in emerging e-sectors. On the other hand, many customers are not interested in more expensive ‘expedited’ services but preferred less costly services with fewer bells and whistles. These concerns reflect Canada Post’s efforts and initiatives to adopt a business model that will create financial viability – moving to a pricing model that guarantees it a return and moving away from a model where pricing had been out of line with costs.  

The small packet service and its pricing are a particular concern, particularly in the e-commerce sector, as Canada’s pricing is high (and possibly rising again), particularly relative to the United States (where economies of scale allow for a far lower price for small packets). At some point, this will push customers to use private couriers. That said, many firms look to partner with Canada Post in nurturing and developing this market. There is a mixed reaction to the introduction of distance-based pricing for publications mail, as it benefits some firms and disadvantages others.

There is some concern about the lack of a clear public policy regarding Canada Post’s authority to move into competitive markets beyond its core business. This raises concerns where Canada Post can become a client’s major supplier and its competitor at the same time, as in the case of admail delivery – a point made by NAMMU. This uncertainty reflects a lack of clarity about what constitutes the USO, which UPS stated should not be self-defined by Canada Post.  

Regulation and deregulation

A significant number of the submissions received did not support deregulation of the postal service; that is, they did not support the tactic of removing Canada Post’s monopoly over letters (the exclusive privilege). This point was raised in three-quarters of all individual submissions received from the general public. In fact, of all the individual submissions which raised deregulation only one was in favour. This was a theme strongly articulated by CUPW, which saw this strategic review as an exercise in promoting postal deregulation ^{[ 3 ]}.

Many Canadians believe that deregulation will inevitably lead to postal price increases, job losses and the deterioration of postal services, as competitors would undermine Canada Post’s capacity by exploiting lucrative routes, leaving Canada Post to high-cost responsibilities without the returns from the lucrative routes ^{[ 4 ]}. Rural Canadians in particular see deregulation as a threat to universal service that will lead to higher prices and poorer service.  

There are mixed feelings about the need to regulate Canada Post, as well as its postal monopoly and market dominance. As noted earlier in the section on pricing, some businesses (represented by CFIB) and some large users (represented by NAMMU) are against the establishment of a third-party regulator, which they see as costly and bureaucratic. That said, they do want some sort of user-friendly, independent oversight. A number of customers feel that the present ministerial oversight arrangement – where the government is at arm’s length from Canada Post – is inadequate, particularly in areas such as competitive practices and cases of disputes between CPC and its customers. This was also the view of the CCNA.

On the other hand, some of Canada Post’s direct competitors feel otherwise. UPS has argued for the creation of a national regulatory authority that would separate ownership from regulation, as has been done across Europe and in the United States. The regulator would have authority in areas such as pricing, investment in new services, quality of service, competition, USO definition and issues, and would have authority to access information and impose fines and remedies.  

Environment

A number of submissions expressed the view that Canada Post has a responsibility in the environmental agenda.

For example, some feel that admail is a misuse of paper and forest products and that Canada Post needs to confront this issue in an environmental way. CUPW suggests that Canada Post becomes the “last mile” deliverer for parcels, in order to reduce repetitive courier and parcel delivery routes by creating increasing delivery density. PSAC recommends that environmental protection criteria be included in all of Canada Post’s policy objectives. CUPW suggested that the Advisory Panel should frame all of its recommendations to the Minister with the environment in mind.

III – What we learned from others posts

The Advisory Panel examined the experiences of a number of posts around the world, with a particular focus on the United States, the United Kingdom, New Zealand, Australia, Austria and Sweden.

Notwithstanding the successful advent and popularity of new electronic communications, it is clear that posts matter to citizens across the industrial world. For many of them, the posts enjoy a special status and they continue to hold the posts in high esteem. Indeed, in many countries, the post is one of the last sizeable enterprises owned or partially owned by governments. This is particularly true in the New World countries (the U.S., Canada, New Zealand, Australia), where public support of the posts is particularly substantial. But most countries demonstrate an ongoing sense that physical communications – like the post – retain a high value as a national/universal communications provider, particularly for small and medium-sized enterprises, rural and small town communities, social organizations such as charities and for parts of the new economy, for example the delivery of goods purchased online. It is for this reason that the posts have remained public enterprises, notwithstanding the strong move to corporatize and commercialize their operations.

The diversity of national backgrounds, contexts and experiences of the posts make national comparisons difficult, if not dangerous. It is evident that there is no ‘one-size-fits-all’ model of successful postal operations. Even with commonalities of public purpose and support, different national posts have adopted different tactics to attain their shared goals.

Notwithstanding these differences, the Advisory Panel ’s comparative study of national posts discovered a number of important shared themes and issues, which have informed its review of Canada Post and helped to determine its recommendations.  

Postal challenges are ubiquitous

All the national posts that we have examined have struggled with the challenge of declining revenues and increasing costs. This state of affairs is not unique to Canada Post.

On the revenue front, all national posts have experienced weakening or flattening of mail growth (and some actual declines), as a result of electronic delivery 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 inexorable rises in labour costs or in the struggle to deal with all the costs of providing the various dimensions of the universal service. Costs in both cases have risen faster than revenues.  

Postal solutions are possible

With varying degrees of success, each of the countries has initiated actions to mitigate costs and increase revenues.

National posts have leveraged their networks, introduced complementary products and services, established new networks and extended existing ones through subsidiaries and acquisitions, and generally integrated their operations vertically and horizontally in order to generate more revenues to support their postal obligations and their USO:  

• Australia Post has successfully leveraged its retail network to a remarkable extent, from providing bill payment and identification/authentication services to selling computer peripherals and selected consumer products. It has 25 subsidiary operations whose services range from document production and logistics to warehousing and express freight delivery.
• New Zealand Post has 17 subsidiaries that are related to its postal operations. It established the highly successful and popular Kiwibank and entered a joint venture with DHL in international services.
• Posten (Swedish Post) entered the business-to-business delivery market and has subsidiaries in Norway (distribution network) and Finland (logistics).
• Austrian Post has established subsidiaries and partnerships throughout Central and Eastern Europe.
• Moreover, posts that have modernized their plants and operations have been able to generate new revenue sources by offering more innovative products and services to their customers.

The international posts sampled by the Advisory Panel have invested persistently and substantially in new technologies to increase their productivity and contain their costs. This has also allowed them to become more competitive and innovative, by adopting new tools, instruments and technologies for collecting, sorting and delivering their products in order to contain costs. New technology also allows posts to introduce new products and services customers demand.

• Australia Post has made persistent and substantial capital expenditures to modernize its plants ($1.2 billion AU over the last five years); its retail network is made up of 23 private firms licensed to provide postal services; labour costs have declined to 43% of revenues.
• While New Zealand’s capital expenditures have been reasonably moderate, it has diminished its labour costs to 39% of revenues.
• Capital transformation has been a regular, ongoing process at Posten (the Swedish post), to such an extent that labour costs have declined to 46% of revenues.
• Austria’s post initiated a massive modernization effort to attain automated, state-of-the-art facilities and processes. This saw a reduction in the number of sorting centres from 39 to six and of delivery stations from 1900 to 300, as well as the reduction of labour costs to 48% of revenues.
• USPS has invested substantially and regularly to upgrade and modernize its plants and equipment and to introduce efficiencies and productivity, as well as new products and services.  

Viable posts have clarified and adjusted their retail and delivery networks to contain costs, by withdrawing from some services (e.g. the Swedish post and financial services), by devising appropriate mechanisms to adjust networks to changing conditions, and by considering the use of new instruments to attain ongoing goals such as licensed postal outlets.

Financial self-sustainability is crucial for postal success

Successful posts experience a ‘virtuous cycle’, to the extent to which they attain financial self-sustainability. On the one hand, financial health allows posts to have the internal earnings and the access to private capital allowed by their financial health that will finance the ongoing modernization and innovation that keeps costs in check while offering continuous improvements in products and service. On the other hand, by constantly containing costs and expanding revenue possibilities, posts can maintain the financial health that enable them to finance their competitive modernization efforts. For example, representatives of the posts in Australia and New Zealand have reported that they have not had to undertake borrowing to finance capital infrastructure expenses.

What has allowed some posts to be financially self-sustainable? The Advisory Panel cannot point to any one single factor, but feels that there is a matrix of conditions that have allowed this. These include: 

• The encouragement of a commercial, corporate culture within a post’s management and on its board, and a clear focus on the customer, service and quality;
• A flexible managerial and governance environment, to allow posts to be nimble and adaptable as markets change and competition develops;
• Light-handed regulation by the shareholder (government) within a clear and concise accountability regime;
• An open and informed dialogue between management and employees on challenges to posts and appropriate strategies for success;
• Reasonable access to capital markets and borrowing within an appropriate accountability regime;
• The extensive modernization of posts as a precondition to the development of their financial viability and competitiveness and capacity to maintain their USO obligations; and
• The ability to adjust workforce size and character to meet changing demands.  

Posts have corporatized

Most national posts have taken on a corporate form – independent of government to varying degrees – to allow them to act in a commercial and economically effective manner, while carrying out their universal service obligations. Indeed, these posts have been required to adopt sound commercial practices precisely to generate the kind of corporate success that will generate the financial capacity to maintain the USO. Injecting a modern business culture into the posts has encouraged flexibility, efficiency, innovation and a focus on service and the customer. This has often been accomplished through mergers and acquisitions, which have brought corporate culture, talent and experience to the posts. Moreover, the independent boards of directors of the posts now boast considerable business acumen, talent and appropriate expertise, which offer both sound strategic guidance and heightened commercial due diligence. This talent has been attracted to the boards of the posts to the extent that the boards and management can operate in an independent and commercial manner.

This ‘corporatization’ accelerated qualitatively in recent years, as national posts have adopted new strategies and techniques:  

• Following the lead set by mega-posts DHL (the German post) and TNT (the Dutch post), the Austrian post initiated an IPO in 2006, which saw 49% of shares go into private hands. The post is now listed on the Vienna stock exchange.
• Posten (Sweden) and Post Danmark are in the process of merging, in order to create a scale of operation that will be competitive after European liberalization in 2011.
• Post Danmark itself partially owns La Poste (Belgium), which has sold shares to a holding company, CVC Capital Partners.
• The report of the Independent Review of Royal Mail – commonly referred to as the Hooper report – has recommended that Royal Mail be partially privatized through a partnership arrangement and TNT has indicated that it would be interested in a stake in Royal Mail.
• New Zealand Post has entered into a joint venture partnership with DHL for international mail.
• Australia Post has entered a partnership with China Post and created Express Courier International (with other posts) for international parcels and courier.  

It is the Advisory Panel ’s view that these initiatives have been practically, not ideologically, driven. They have been used as a tool to enhance the ability of national posts to fulfill their mandates, by injecting market and corporate sensibilities and disciplines into the posts by:

• Bringing talent and expertise into the posts;
• Strengthening the national posts to face competition; and
• Helping with investment plans and modernization by providing capital to the posts or freeing them from costs.  

The Advisory Panel notes that the United States Postal Service is the least corporatized post it has examined. It remains very much embedded within the executive branch of American government. This is executed via a politically appointed and politically informed board and a substantial third-party regulator (also politically appointed), whose authority has been recently enhanced. The possible range of USPS activity is thereby highly circumscribed through legislation and regulation.

Successful posts have corporatized to become financially viable, competitive and capable

With very few exceptions, the evolution of viable and capable posts has followed a particular sequence of developments.

First, all posts have been transformed from departments of government and established as state-owned enterprises or Crown corporations, with a certain degree of autonomy.

Second, the posts were ‘corporatized’ by injecting commercial principles and values into their operations (through recruiting of managers and board members), while their public or social obligations were regulated or maintained through mechanisms particular to their national environments and settings.

Third, these posts were encouraged to be competitive through the gradual introduction of a degree of liberalization (market opening) and the prospect of eventual market opening to full competition.

Fourth, the posts underwent an intense period of modernization to increase their productivity and efficiency and to ready themselves for increasing competition, as in Europe, where the EU has scheduled full liberalization for 2011.

Fifth, posts increased their corporatization through partnerships or share offerings with private sector operators in order to inject further capital and managerial/market expertise and value into their operations.

Sixth, as posts became competitive and modernized, their domestic markets have been opened up to increasing degrees of competition and, in some cases, full competition.

The German and Dutch posts have proceeded farthest through this cycle. Their shareholders encouraged them to become world postal and communications leaders, and they adopted an aggressive growth strategy through acquisitions and mergers across Europe and the world. They used their market dominance to access capital and investment funds to finance acquisitions and to modernize their operations. As formidable international players, they then issued shares to obtain capital and expertise and to impose the disciplines of the market through listing on stock exchanges. They eventually re-branded themselves and look and act like private sector operators, as DHL and TNT respectively. While a certain degree of deregulation was taking place throughout this cycle, it was then and only then that their governments considered full market liberalization, which is coming across Europe in 2011. Germany liberalized its own market in January 2008.

In short, these posts have enjoyed a strategy of modernization and corporatization in anticipation of the full opening of the postal market.

In contrast, the U.K.’s Royal Mail appears to have experienced the opposite cycle, as reported by the Hooper review in its interim report of May 2008. Before 2006, British governments successively took away Royal Mail’s profits and resources and maintained low postal prices, with the result that Royal Mail was historically capital-poor and unable to match the modernization that was occurring in continental Europe. In a daring but ill-fated move in 2006, the United Kingdom adopted a market-shock approach, fully deregulating the postal market and placing Royal Mail in a fully competitive market environment, for which it was ill-prepared. The third-party regulator, Postcomm, further complicated matters by forcing and accelerating competitive developments, by giving away Royal Mail’s market share and by constraining price adjustments. Predictably, Royal Mail has been unable to compete and is capital-starved to make the modernizing investments that would allow it to compete with modernized and efficient posts like TNT.  

Successful posts have appropriate governance and regulatory arrangements

The Advisory Panel notes that effective national posts operate in well-constructed governance arrangements that simultaneously encourage modern business practices and attention to public purposes. These governance arrangements assign clear and transparent responsibilities and authority to management, boards and shareholders, in order to make the operation of the posts accountable and effective. These arrangements aim at ensuring that neither commercial considerations nor public policy objectives dominate to the neglect of the other. To the extent that the governance arrangements (and postal performances) are successful, these arrangements function with little friction.

There are numerous postal governance and accountability regimes around the world. Some include an independent third-party regulator. Some offer extensive autonomy and independence to their boards and management, while others see more direct government control on either the financial or regulatory side or both. Some set regulatory or service targets in law, some in licences, others in contracts. Some set financial targets. But these are basically tactics to attain common goals.

The one feature that they do have in common is that they all provide for clear, transparent and separate lines of accountability for ownership/shareholder (financial) and regulatory (social) issues. This is at the heart of the governance issue: how to set out a clear, transparent accountability arrangement that encourages commercial performance and the attainment of social goals simultaneously and in some sort of balance – without too much government control (or neglect) inhibiting the attainment of one or the other objective. 

A sampling of national postal governance regimes

Australia

There is a dual department regime postal oversight in Australia. The Minister for Finance and Regulation is the shareholder minister, focusing on financial matters and interested in dividends. The Minister for Broadband, Communications and the Digital Economy – in effect, the minister of communications – is responsible for all non-financial matters, particularly governance, USO and service matters. This model works openly, deliberately, regularly and predictably.

The communications ministry appoints the Board of Directors, and its members are all commercially oriented and experienced, with a high and substantial degree and range of expertise – typical of all the boards considered in this section. It receives, reviews, and approves management’s budgets and corporate plans, which are discussed informally with the ministry before being finalized and submitted for formal review. The Board is reasonably autonomous in all business and capital investment areas, save for extraordinary initiatives such as the acquisition or formation of a company or a major international initiative. Again, this is typical of the governance regimes examined in this section. The Board determines major investments, and capital plans are typically accepted by the minister after review and discussion. There is a longstanding understanding that the post should not enter markets that are already serviced by the private sector, and that the post should engage internationally only to the extent that it leverages its domestic activities from its reserve area. Financial targets are set internally in the plan and are publicly declared. The minister could challenge these targets and ask that they be set higher. Price issues are reviewed by the Australian Competition and Consumer Commission and approved ultimately by the communications ministry.

The communications ministry oversees USO and non-financial matters. Social or USO targets are established and expressed in community service obligations. These standards revolve around the basic USO – basic letter and parcel service and scope; uniform pricing for letters; accessibility regardless of location; reasonable service performance. These are all quantified and expressed in public targets, from the number of street boxes and outlets in rural and urban areas to delivery frequency and standards. The Auditor General monitors these targets and performance results for the communications ministry.

New Zealand

The New Zealand model is similar to Australia, and has been as effective, partially reflecting the consistency of this approach over the last two decades and the openness and trust that have been engendered among the players involved. The dual department model includes the Minister of Finance and the Minister of State-Owned Enterprises on shareholder/financial matters, and the Ministry of Communications for regulatory/social matters. This duality requires periodic and regular debate about postal matters in cabinet, to resolve the trade-off between shareholder and regulator.

The shareholding ministries collaborate to appoint an independent board of directors. The Board is commercially competent and experienced. Management prepares an annual three-year statement of corporate intent (SCI), which the Board reviews and approves and presents to the shareholding ministers. The SCI is a public document, contains financial targets, and is set annually. It has increasingly been made up of non-financial social metrics (corporate social responsibility). There is a very open relationship between the New Zealand Post and the shareholding ministries, with ongoing anticipatory and interactive dialogue to avoid surprises and to build up trust. If an initiative is particularly ambitious or transformative – for example the DHL partnership or the creation of the Kiwibank – the Board will seek the active support of the shareholding ministries. The Board manages capital expenditures and can go to the market to borrow capital. To the extent that the post delivers on value and dividends, there is not much actual interface with the ministry of finance.

The Ministry of Communications administers the regulatory environment, advised by the Ministry of Economic Development on competition issues. The New Zealand Post operates under a public performance requirement that resembles a contractual rather than a legislative approach. This is called the deed of understanding (DOU – 1998), which includes a set of requirements on frequency of delivery, number of delivery points, service standards and (until recently) price limits. It can be updated or renewed. The DOU is a public document and has been stable for a number of years while there is no longer any price cap in place. The DOU establishes a matrix of service and policy goals in public, to ensure that services will not decline under the pressure of commercialization and making profits.  

Austria

Austria’s post operates in a dual-department environment as well, but the parameters are somewhat different, given that the government owns only 51% of the shares. The shareholding function operates indirectly through the government agency Österreichische Industrieholding AG (OIAG), which is the state holding company that administers the government’s stake in all of its state-owned enterprises. It acts to protect the government’s financial interests and to increase share value. Austria’s post has a 12-member supervisory board, which includes a strong independent, business presence, four union representatives and the Chair of the OIAG, which provides the link to the shareholding interest. The supervisory board has a strong business orientation and considerable autonomy on business and investment decisions. But these are in effect vetted via the OIAG, which processes board targets and performance comparatively against market performers like DHL and TNT. The government can also express its interests through the annual general meeting and the Department of Finance, which anticipates profit-making and receiving a dividend. A business-oriented four-person management team plans budgets and three-year plans, which are approved by the supervisory board. No specific financial targets are set other than the expectation to show a profit.

The regulatory department has been the Ministry of Transportation, Innovation and Technology, which has overseen service criteria and approval of pricing. It has defined the USO and quantified targets in postal scope, quality, access, price, service delivery and access (the network), which are set out in a postal law. However, given EU requirements, a new regulatory approach has come into effect in 2008 which will see this environment shifted to the regulatory body for telecommunications.

Sweden

The Swedish approach sees a ministry responsible for the shareholding function
(the Minister for Enterprise and Energy) and a third-party agency – the Swedish Post and Telecom Agency (PTS) – responsible for the regulatory function. The former implements the broad state-ownership policy and appoints a board, which in turn appoints the executive management. The Board includes four union representatives and a government representative. The Board has corporate autonomy similar to typical private sector companies. It receives, reviews and approves management’s capital and investment plans without ministry involvement, save for major acquisitions.

Notwithstanding that it operates in a completely liberalized competitive market,
Posten (the Swedish post) is regulated by PTS, which actually licenses Posten to perform the functions and activities established as the USO in the postal act and ordinances. The USO is well-defined in Posten’s legislation, and sets out quantified targets in postal scope, timing, delivery standards, uniform price, and so on. Interestingly, there are no regulatory requirements on the number of mailboxes or postal offices and what used to be a requirement (the provision of financial services) ended in 2008. Any changes to these quantified targets are negotiated between Posten and PTS in a contractual and reasonable way. Any public policy obligations or functions carried out by Posten – e.g. mail services for the blind – are purchased (compensated for) by PTS.

This governance environment will likely change if the planned merger of Posten and Post Danmark takes place (See page 24).

IV – Postal conditions and postal needs: The view from Canada Post

The Advisory Panel examined Canada Post reports, plans and other documents, met with Canada Post officials and managers on numerous occasions, and visited a number of CPC plants and outlets, to gain an understanding of the corporation’s analysis of the changing nature of the postal market, operations, and customer needs, as well as to gain an insight into what Canada Post considers to be the challenges and requirements facing the corporation.

Notwithstanding that it has made a profit in 13 consecutive years – and has delivered $1 billion to the government in taxes, dividends and return on capital in that period – the Canada Post segment of the CPC Group maintains that it is in a financially precarious and uncertain financial position, and will remain so unless a number of substantial issues are confronted and resolved. Indeed, as the Advisory Panel understands it, Canada Post Group’s existing level of profits is derived primarily from its Purolator operation. The Canada Post segment itself is barely breaking even.

In 2007, performance improved in all segments when compared to 2006, except the Canada Post segment where income before income taxes fell by $21 million as reflected below:

Table 2: Results by segment – Income before income taxes

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Source: 2007 Annual Report
* Canada Post segment produces $78 million in income from $5 955 million in total revenue.
** Purolator segment produces $84 million in income from $1 448 million in total revenue.
While the Canada Post segment’s total revenue is over four times that of Purolator it produces $6 million less in income as compared to Purolator.

(i) Canada Post’s view of the world

The following section presents Canada Post’s understanding of the nature of the postal environment and its assessment of what it requires if it is to develop the financial capacity required to be competitive, commercially successful, and capable of delivering its USO commitments in an effective and affordable way.

The postal environment has changed

Historically, posts were given an exclusive privilege on lettermail (the reserved market or monopoly) to finance the costs of the universal service obligation. According to Canada Post, the changing postal environment is undermining the financial value of its exclusive privilege and threatening its capacity to finance and maintain its universal service obligations.

To begin with, the revenues from the reserved market are under significant pressure from a number of sources. As is widely appreciated, lettermail volumes are flat or in decline – CPC anticipates at least a 1% annual decline in volumes over the next five years. This reflects two developments. First, there has been a substantial loss of business and transaction mail, for example bill presentment and payment, which can now be executed electronically. Second, there is increased direct competition from foreign and domestic firms in the broad postal sector, a tendency that would be accelerated if Bill C-14 (please refer to page 80) were to be reintroduced and passed, liberalizing outgoing international mail. Generally, CPC feels that much of the lettermail sector has been de facto deregulated, if not de jure.

On the other hand, the costs of delivering the mail are rising at an accelerating pace. Over and above the impact of rising transportation and labour costs, demographic growth produces approximately 200 000 new postal addresses a year. Canada Post notes that in conjunction with weakening volume growth, the number of pieces of mail delivered to each address has declined, from 395 pieces a year per address in 2003 to 373 in 2007.

It could be anticipated that increasing revenues in the non-reserved markets, such as parcels and direct mail, could mitigate this loss of revenues in the traditional sector. However, there is increasing and fierce domestic and foreign competition in these sectors that limits potential revenue growth.

CPC characterizes the postal market as a declining one but, ironically, it is also an increasingly competitive one. For this reason, it recommends that any initiative to deregulate the postal market should proceed very carefully and in a paced and moderated way. If done rashly or without proper preparation, CPC’s financial capacity to maintain the USO would likely be so weakened that service quality would decline. Canada Post points to the United Kingdom as an example of what could happen if deregulation is poorly managed – that is, where a postal market is deregulated before a post is capable of competing with new entrants. Royal Mail is suffering severe market loss as a result and is increasingly less able to pursue its USO obligations and is relying on government funding to run its operations.  

CPC’s financial position is at risk

CPC notes a number of other cost and revenue factors that put its financial situation at serious risk.

On the one hand, Canada Post claims that it has insufficient control over its revenues from its reserve area and enjoys insufficient ability to raise capital:  

• In 1998, the government set a price cap on the basic lettermail rate, limiting price increases on lettermail to two-thirds the rate of the growth in the Consumer Price Index (CPI), but Canada Post’s costs have increased faster than the rate of growth of CPI. The result is that Canada enjoys very low postal prices – the price of a basic lettermail stamp is third-lowest in the industrial world.
• As a result of its low rate of earnings, and government rules that limit its ability to borrow from the private sector, Canada Post has inadequate access to capital markets to finance its capital investment and modernization plans.  

Table 3: Basic letter rate ($CDN) as of June 1, 2008

On the other hand, Canada Post claims that it has costs beyond its direct control:

• It is not fully or sufficiently compensated for the costs of a number of its public policy objectives (PPOs) above and beyond the USO – e.g. Government Free Mail, Materials for the Use of the Blind, Library Book Rate, and so on, which Canada Post calculates at a net cost of $40 million annually;
• Like other federally regulated institutions, Canada Post has faced recently unpredictable and potentially significant cash drain as a result of having to meet strict solvency calculations on its pension plan;
• Canada Post declares that the recent rural mailbox delivery (mail safety) directive has imposed enormous costs on the corporation;
• The manner in which the rural moratorium has been devised has made it difficult for it to adjust network costs in response to changing demographics and community needs; and
• The costs associated with two decades of collective agreements have made it difficult for Canada Post to contain its labour costs, which consume a higher proportion of its revenues (64%) than comparable, more successful posts (below 50%). 

Table 4: Consolidated labour costs expressed as percentage of revenues

CPC presents three further structural constraints on its capacity to attain financial self-sustainability: inadequate postal modernization, a poorly aligned network, and an inhibiting internal culture.

Postal transformation and modernization are needed

Canada Post notes that it is essentially a ‘network’ company that relies heavily on technological equipment, processes and operations to pursue its responsibilities of receiving, sorting and delivering 40 million postal items each and every day. Other successful posts (see International Posts section above) and competitors have modernized their plants, equipment and processes to new business standards. As a result of the constraints on financial self-sustainability noted above, Canada Post has lacked internal capital resources and has made insufficient investment in plant, technology and equipment over the last two decades. In effect, Canada Post has been borrowing against the future, maintaining budget balances and modest profits and dividends by not investing sufficiently in capital upgrades and modernization. The chicken has now come home to roost.

Most of Canada Post’s 21 plants are more than 40 years old. The Advisory Panel has visited a number of Canada Post plants that do not compare favourably with modern postal and delivery plants that the Advisory Panel has visited in the private sector and in the United States. Many Canada Post plants contain equipment so old that replacement components are difficult to find. Much of the CPC network, facilities, sorting equipment and information technology is obsolete and in serious need of upgrading in order to provide an adequate and modern technological platform for their operations. According to Canada Post, the consequences of delay have been significant in a number of areas:  

• Deteriorating plants and equipment generate regular equipment failures and present significant health and safety risks (manual handling of outdated containers and equipment generate close to 40% of plant injuries);
• The absence of an adequate technological platform leaves Canada Post vulnerable to service deterioration and periodic complete breakdown of service, which in turn increases costs associated with alternate transportation;
• Relative to its competitors, CPC cannot provide the technologically informed products and services that its customers expect (for example, parcels track-and-trace) and that would enable it to retain relevance in creating future e-offerings and innovations;
• It does not enjoy the technology required to (a) ensure an adequate address management capability that meets the needs of direct marketing firms and (b) update and correct addresses to avoid misdeliveries; and
• CPC cannot generate the increased information, efficiency and productivity required to neutralize and manage cost and revenue pressures without modernized plant and equipment.  

In short, CPC feels that it cannot be competitive, reach current business standards and attain financial self-sustainability within the present technological environment without significant investment in new plant and equipment. And without modernization, there will be an inevitable deterioration in service and financial health. This will have serious consequences for its capacity to pursue its USO commitments and provide quality mail service to Canadians at an affordable price.

Need to better align the network

According to Canada Post, the delivery and retail network is not well or properly aligned with the distribution of the Canadian population and demographic changes over the last two decades.

On the one hand, most postal outlets (60%) are in non-urban areas, where only 20% of Canada’s population live. Some of these outlets average as few as five customers a day; modest traffic and sales make them uneconomical to operate (the 60% of outlets produce 33% of total retail revenues). On the other hand, the government moratorium on the closure and/or conversion to private dealer outlets of post offices designated as rural has inhibited a realignment of the network to modern conditions. While asserting that it is committed to providing excellent service everywhere in Canada – and to maintaining the rural mail delivery system in particular – Canada Post notes that the notion of ‘rural’ is not well defined, with the result that some locations do not fit what most would consider to be a rural situation. This has led to irrationalities in the existing system. Moreover, the distinction between corporate (CPC) versus private dealer outlets has created roadblocks to adjusting the network. After 14 years, CPC suggests that it would be timely to revisit and refresh the government-imposed moratorium on post office closures.  

Internal culture needs changing

Canada Post points to two last internal or corporate factors that have, in its view undermined its capacity to maintain financial self-sustainability: its collective agreements with CUPW and the governance arrangements within which Canada Post operates.

Canada Post suggests that its collective agreement with CUPW – and the internal cultural environment that it creates – limits CPC’s capacity to create a business or operational culture and environment that could lead to actions to produce financial self-sustainability. These barriers include: 

• An over-emphasis on job creation as a postal goal;
• Complex collective agreements that create performance rigidities, inhibit change and deter customer focus;
• Time-consuming and distracting grievances; and
• Creation of an internal culture of risk aversion.  

Canada Post also maintains that governance arrangements with its shareholder (the government) inhibit the effective use of the authority and expertise of the Board, thereby making CPC less agile and nimble than it might be, as it seeks to attain commercial and competitive viability and financial self-sustainability. Canada Post suggests that government oversight is out of proportion to requirements, with the following results:

• The process for obtaining approvals of corporate plans, certain commercial transactions, and borrowing can be very lengthy;
• Market opportunities can be lost while lengthy oversight processes unfold; and
• The processes generate an extremely risk-averse environment, thereby inhibiting the corporate and commercial development of CPC.

(ii) Canada Post’s assessment of its needs

Canada Post declares that it must become a strong, efficient and financially self-sufficient company if it is to successfully focus on its customers and deliver high-quality and innovative products and services. What follows is its assessment of its needs and the requirements which, if fulfilled, would enable it to become such a company.

Deregulate when appropriate

CPC notes the trend to deregulation in the postal world, particularly in Europe where the EU has mandated postal liberalization by 2011. It accepts the concept and logic of deregulation – at the appropriate time.

Canada Post encourages a ‘measured’ approach to liberalization, according to an extended timetable, in order to:

1. Allow CPC to adjust to increased liberalization and competition at each stage of the liberalization; and
2. Ensure that CPC’s revenues remain sufficient to maintain the USO and/or adjust the USO appropriately to the new conditions.  

CPC also notes that deregulation now would not be timely or appropriate, for a number of reasons:

1. The postal sector is a legacy industry, with declining letter volumes and increasing competition – a poor environment for successful deregulation; and
2. Posts that have successfully survived deregulation went through a postal transformation or modernization first, which allowed them to be competitive in a deregulated environment. This is the process that CPC suggests should be its mission over the next five-10 years.

CPC notes the successful deregulation of postal markets in Germany, The Netherlands, Sweden, Austria, etc., where postal transformation and modernization preceded deregulation. In contrast, it notes the unsuccessful experience in the United Kingdom, where Royal Mail is struggling to modernize after deregulation.

Clarify and fund its public policy objectives (PPOs)

Canada Post maintains that public policy objectives – over and above the USO – should be explicit, transparent and in writing, in a service arrangement or contract between the government and CPC. Underlying any such public policy arrangement, Canada Post should be compensated at commercial rates for delivering these services at levels commensurate with market rates. Increased postal rates should not be the source of financing for non-USO public policy objectives.  

Modify the rural moratorium

After 14 years, Canada Post suggests that the government-imposed moratorium on the closure of rural post offices should be revisited – not eliminated – and brought up to date with new circumstances. This would provide it with some increased flexibility in adjusting its retail network to changing market and demographic conditions, while maintaining a quality rural service.

To do this, CPC proposes:

• A clear and updated definition of what constitutes a rural area to provide the basis for constructing an appropriate network and service standard. The Statistics Canada definition might apply;
• The creation of what it terms a proximity-based standard of service, to establish geographic criteria for its obligations to maintain or provide outlets (for example, 80% of rural outlets within 7.5 kilometres of a postal outlet);
• The periodic review of the network in light of these criteria; and
• The maintenance of a clear community consultation process when any change is proposed.  

Financial self-sustainability

Canada Post argues that unless it attains financial self-sustainability, its capacity to deliver
on its USO obligations and commitments to its shareholder cannot be guaranteed. Financial self-sustainability means more than simply breaking even. It suggests a level of capacity that can (among other things) finance the ongoing modernization that will keep CPC competitive and capable of meeting customer needs and the USO. To attain this end, it maintains that it requires a clear and effective framework for financial sustainability, which would include greater financial flexibility and revenue certainty than it now enjoys. Funding PPOs commercially and allowing network adjustments would be two important components. A third requirement would involve the following changes to postal pricing:

• Removal of the existing price cap formula (price changes at two-thirds of CPI), which has kept the basic lettermail price artificially low and well below the rates of posts in Europe;
• Creation of a pricing regime that would see all postal prices – including regulated postal products in CPC’s exclusive privilege – set in line with market conditions;
• Full pricing autonomy would be granted to CPC, with government override only in exceptional circumstances; and
• It is Canada Post’s view that increased competition – both directly from competitors and indirectly through product competition and substitution – has effectively deregulated prices in Canada.  

In conjunction with this pricing regime, CPC is seeking relief from the financial uncertainty that surrounds its pension plan, uncertainty and unpredictability that can quickly transform into enormous financial demands on its cash and budget, thereby undermining its investment and modernization plans. Canada Post recommends that it should continue to be required to fully fund its pension plan on a ‘going concern’ basis. However, it asks that;

1. It be exempted from the pension solvency rules established by OSFI, the pension regulator; or
2. The Government of Canada declare formally that it would fund any deficit, in the event that CPC is wound up.  

Postal transformation and modernization

According to Canada Post, postal transformation is not an option that can be deferred. It is at the heart of CPC’s plan to attain financial self-sustainability and maintain the USO and quality service.

The postal modernization plan includes upgrading and replacing buildings; purchasing new sorting equipment to facilitate reduction of manual mail sorting; the adoption of new technology to underpin sorting equipment and better manage delivery standards; developing greater e-service capacity; and training and change management. By modernizing the network and bringing in new technology, Canada Post believes it will be able to provide better service and innovation, attain market competitiveness and reach financial equilibrium.

Canada Post estimates that the new capital investment required will be in the order of $3 billion over the next seven years, in addition to the $200 million on average, spent on regular infrastructure maintenance, annually. It estimates that this investment can be recouped through increased productivity within eight years after completion. CPC argues that it has a one-time, conjunctural opportunity to initiate such a transformation, as a large cohort of its employees (27 000) is expected to retire or to leave the corporation over the next decade.  

What does Canada Post feel that it needs to pursue this transformation?

First, it needs increased financial capacity to help to finance this plan, as set out in the discussion on pricing, pensions, the rural network, commercial rates for PPOs, and so on.

Second, it requires increased access to capital markets, in conjunction with a raised level of borrowing authority – from the present limit of $300 million to a revised amount that is appropriate to financing its capital needs over the course of the modernization plan.

Third, it needs to make adjustments to its internal operating culture and practice, as noted in the next section.

Internal culture

According to Canada Post, financial self-sustainability cannot be attained without two important changes to its internal culture and operating practices. One change relates to its employees. The other change refers to the practices of its board and management.

Canada Post declares that it cannot by itself transform the internal employee culture associated with the influence of the CUPW agreements and resulting culture and practice. To this end, it requests:  

• A public third-party assessment of what changes would be required in the CUPW agreement to make CPC competitive;
• A commitment by the government to support the objective of the next round of collective bargaining, which would be directed to crafting a collective agreement that would contribute to the creation of financial self-sustainability for CPC; and
• Government action to create an employee share ownership plan.  

Canada Post also recommends the creation of a clearer and more effective governance environment, to allow its board to carry out its responsibility in pursuing shareholder objectives in an effective way. This would require clarification and strengthening of the role of the Board, in the following ways:

• The nominating committee of the Board should have a role in making recommendations to the shareholder to appoint top, qualified directors with business, executive and director experience;
• The Board should be given the authority to recruit, appoint and evaluate the performance of the CPC CEO;
• The Board should be given greater authority to pursue transactions up to $250 million without government approval;
• The Board should have the discretion as to whether to issue dividends, particularly in periods of intensive and extensive re-investment; and
• Corporate plans should continue to require government approval, but they would be considered to be approved by the government after 60 days if the government chose not to respond.  

V – Concluding observations of Part I

In the preceding pages, the Advisory Panel has reported what it learned from its analysis of the market, from submissions from and consultations with individual Canadians and organizations, from its analysis of and discussions with international posts, and from its extensive review of and consultation with Canada Post during the strategic review.

Through this process, the Advisory Panel has been impressed by a number of issues:

• Canadians continue to value the post and the universal postal service;
• The operation of a modern postal system is a very complex business;
• The postal market is changing, with traditional lettermail less important and competitive postal products more important in the postal market mix;
• Canadians do not have a realistic understanding of these complexities or of the financial challenges facing Canada Post;
• Canadians have a variety of experiences with Canada Post, and anticipate some policy and process changes; but there is no desire for a radical alteration in the present postal regime;
• There is sufficient talent, expertise and experience on the Board and management of Canada Post, in most areas, to ensure its success, in the right financial and policy environment; and
• The experience of a number of international posts demonstrates that appropriate governance arrangements can contribute substantially to the creation of a viable post.  

Given what it has learned, the Advisory Panel feels that there are five issue areas that should command its attention as it formulates recommendations for a new, updated and improved financial and policy environment for Canada Post.

First, the universal service obligation lies at the heart of the postal endeavour by a Crown corporation. The shareholder should make clear to the post what its expectations are of the USO in the 21st century. The Advisory Panel feels that there is an immediate need to establish a clear, concrete, and transparent understanding of the USO.

Second, the Advisory Panel is convinced that it is unrealistic to consider the purpose of the postal system – the provision of the USO – without considering how the USO is to be delivered. In short, the ‘ends’ or objectives of postal policy should not be considered independent of the ‘means’ or instruments to those ends. The Advisory Panel was impressed with modernization developments in certain posts abroad, which stand in stark relief to the situation at Canada Post. The Advisory Panel feels that there is an urgent need to both address obsolescence issues and modernize the postal system and network in Canada, to maintain its competitiveness and to aid in productivity. The Advisory Panel considers this requirement to be integrally linked to fulfilling its USO.

Third, Canada Post cannot modernize its network unless it has the financial capacity to do so. The Advisory Panel was impressed at how some international posts were given and developed the financial self-sustainability that enabled them to continuously update and modernize their operations, so that they had the capacity to pursue their USO. The Advisory Panel feels that it is absolutely imperative to take the steps necessary to assure long-term financial self-sustainability for Canada Post.

Fourth, there is considerable anxiety and concern in postal discussions with regard to the future of postal services in rural Canada. The Advisory Panel does not accept that providing quality service in rural Canada stands in antagonistic relation to the goal of financial self-sustainability and postal modernization. The Advisory Panel feels that there is a need for the shareholder to formulate, articulate and communicate a clear and transparent understanding of Canada Post’s roles and responsibilities in rural Canada.

Fifth, as noted above, the Advisory Panel was struck by the experiences of a number of international posts, which demonstrated that appropriate governance arrangements could contribute substantially to the evolution and development of a viable post. There is some uncertainty in the Canadian system about how much corporate autonomy Canada Post should enjoy and how much control the shareholder should exercise. The Advisory Panel feels that there is a critical and compelling need to clarify, make transparent and operationalize the respective roles, responsibilities and authority of each of the government (shareholder), the Board of Directors and Canada Post’s management.

Part II will pursue these five compelling issue areas by way of laying a foundation for the Advisory Panel ’s recommendations in Part III.  

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Part I:  Footnotes

[1] Strategic Counsel, 2007

[2] Among those expressing these views were the CLC, NAPO and the Council of Canadians with Disabilities.

[3] The Advisory Panel received 23 500 postcards against deregulation as a result of a CUPW initiative.

[4] A view expressed by the CLC, Coalition for seniors, NAPO and CCPA.

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