The Government of Canada mandated the Advisory Panel to examine Canada Post’s public policy objectives and its ability to remain financially self-sustaining. The Panel was also asked to consider the continued relevancy for Canada Post of the 1998 Multi-Year Policy and Financial Framework. This strategic review sets the stage for the next steps in Canada Post’s evolution. These next steps must be informed by the fact that the postal world has been transformed by new market conditions, globalization and technological change. The objective of the strategic review is to help to improve Canada Post’s capacity to pursue its responsibilities through the development or addition of appropriate policies and tools that will allow it to confront these new postal conditions. At the same time, the objective of the strategic review is to devise new ways for the shareholder (the Government of Canada) to articulate and communicate its social goals and expectations about the postal system to Canada Post, even as the corporation matures into a more autonomous corporate entity able to pursue its responsibilities in the new and challenging postal environment.

The Advisory Panel’s analysis in Part II will lay the foundation for the Part III presentation and explanation of the recommendations that the Advisory Panel is presenting to the Minister, including a financial and service framework in a clarified governance environment. This framework and these recommendations have two aims: establishing an appropriate degree of corporate autonomy and capacity for Canada Post, so that it has the tools to successfully address new market conditions and its USO responsibilities while at the same time devising a new and improved way for the shareholder (the government) to clarify, articulate and communicate its objectives to CPC. Neither of these aims should trump the other: Both should be pursued in tandem.

The strategic review’s Terms of Reference, and indeed what the Advisory Panel heard from Canadians and from Canada Post, have led us to conclude that there are five critical issues that should command attention as we proceed to analyze Canada Post’s and its shareholder’s needs, and formulate recommendations for action.

First, the universal service obligation lies at the heart of the postal endeavour by a postal Crown corporation. If there were no USO, there would be no need to have a government-owned Crown corporation attending to the postal system. The shareholder must clarify what its expectations are of the USO in the 21st century, and both the Government of Canada and Canada Post must develop a mutual understanding of the USO and what it entails.

Second, how the USO is to be realized in practice cannot realistically be divorced from the principle of the USO itself: The ‘ends’ or objectives of postal policy cannot realistically be considered independently of the ‘means’ or the instruments to that end, particularly in a complex environment like the postal world. Modernization efforts and developments in many posts abroad stand in stark relief to the situation at Canada Post, where there is an urgent need to modernize the postal system and network so that Canada Post can successfully pursue its USO obligations.

Third, it is unrealistic to expect a post to modernize its postal network and processes unless it has the financial capacity to do so. Many posts abroad were given and have developed the financial self-sustainability that has enabled them to update and modernize their operations so that they have the capacity to pursue their USO commitments: Canada Post must have access to the appropriate tools it needs to maintain financial self-sustainability, in order that it can modernize its operations to have the capacity to successfully pursue its USO.

Fourth, the future of postal services in rural Canada requires particular attention. The continuation of a blunt policy instrument like the moratorium on rural postal closings, in effect since 1994, is symbolic of the fact that there has been inadequate conceptual or policy attention paid to this area. What is needed is the formulation, articulation and communication of a clear and transparent understanding of Canada Post’s roles and responsibilities in rural Canada.  

Fifth, the experience of many posts abroad demonstrates that appropriate governance or institutional arrangements can contribute substantially to the creation of a viable post and effective postal policy. There is some uncertainty in the Canadian system about how much corporate autonomy Canada Post should enjoy, as well as how much control the shareholder should exercise. What is needed at this stage in Canada Post’s evolution is 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. This will create a policy and governance environment that will encourage effective and timely decisions about the USO, rural post, modernization and financial sustainability.

I – The universal service obligation

In the Terms of Reference assigned to the Advisory Panel, the Minister presents a number of principles that direct us to consider the universal service obligation as being at the heart of our considerations:

• Canada Post will not be privatized and will remain a Crown corporation;
• Canada Post must maintain a universal, effective and economically viable postal service; and
• Canada Post is to continue to act as an instrument of public policy through the provision of postal services to Canadians.  

The USO lies at the heart of the postal endeavour in Canada. This is implicit in the government’s ongoing commitment to a postal Crown corporation. If there were no universal service obligation – that is, if there were no postal objectives covering the entire country and all its citizens – then there would be no real need to have a government-owned entity attending to the postal system. The postal system would not be a matter of public policy for the government, which would then not have a responsibility for the postal and mail systems.

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 with levels of service that would be similar in communities of similar size. This lack of specificity gave the corporation a certain amount of flexibility to adapt to its newly commercialized environment. Almost three decades later, the Canadian postal environment has changed significantly. Today it can be argued that the lack of clarity around what is, should be, might be, or could be included in Canada Post’s USO is creating challenges and confusion for Canada Post, its shareholders and its customers.

The question is: “What is (or what should be) Canada Post’s universal service obligation today and for the foreseeable future?”  

This question is particularly important, given the government’s continued commitment to operating the postal system through a Crown corporation. The government has chosen an autonomous corporate form for the delivery of its postal expectations, as opposed to a departmental (or private) form. There are sound reasons for this decision, given the complexity and character of modern postal operations – a decision confirmed by similar government decisions throughout the industrial world. It is the Advisory Panel ’s view that, as Canada Post evolves as a corporate entity, and even as it develops and may some day be granted more corporate autonomy, it is vitally important that the government clarifies and specifies its expectations of what the USO entails. Canada Post’s operating framework should reflect both its corporate and its USO goals. If it does not do so, there will be ongoing public and corporate confusion and the real likelihood that commercial considerations will predominate over the USO or social ones.

While 100% certainty is not possible, especially in a changing world, the Advisory Panel believes that the USO should be clarified. This basic position has focused the discussion of the four other critical issues to be reviewed in this section:  

• The nature of the USO expectation implies the need for a postal network. Modernization of this network is integral to Canada Post’s capacity to realize its USO obligations;
• The character and specificity of the government’s USO expectations will, in turn, shape the business model and therefore financial requirements of Canada Post over the long term;
• The government’s USO expectations will shape the character of and expectations for postal service in rural Canada; and
• Clarifying USO expectations and communicating them clearly will also help to clarify the respective obligations, rights, privilege, duties and responsibilities of the shareholder (the government), the Board of Directors of Canada Post, Canada Post’s management, and of Canadians and postal customers.  

(i) The universal service obligation

The Advisory Panel feels that three dimensions of the universal service obligation need clarification: the principles and practices of the USO: its physical or network dimension and its financial consequences.

Notwithstanding the fact that the phrase universal service obligation is commonly used, there is little common agreement in Canada or internationally about precisely what it entails. This partially reflects confusion about the USO’s goals and about the mechanisms used to attain them. While there is general agreement about the goals of the USO, there is disagreement about how the USO is to be attained and regional differences as to what should be done. These mechanisms have varied historically and have varied among countries, given different national conditions, priorities and capacities. The principles of the USO need to be supplemented by operational practices and specifications. In the last analysis, it is the government’s responsibility to periodically specify, clarify, and update which mechanisms or instruments will be used to attain the objectives of the USO.

The CPC Act requires Canada Post to “maintain a basic and customary postal service.” In this context, the particular and essential ingredients of the Canadian USO have evolved to mean that:

• The postal service will be universal;
• The postal service will be affordable;
• The postal service will be timely;
• The postal service will be accessible to all Canadians, regardless of their location; and
• The postal service will provide a quality service.  

While not explicit, it is widely understood that the USO applies as much to businesses and organizations as to individuals living in Canada, given the post’s historical mission of allowing Canadians to communicate to each other and allowing business and the market to expand and develop with help provided by the postal system. So, the USO can be inferred to require Canada Post to deliver letters and parcels to and from each and every residential and business address in Canada. Canada Post articulated elements of this responsibility in its submission to the strategic review – when it declared that its role is to provide a basic letter and parcel service to every person and every business, regardless of location, every day.

There may be widespread agreement on the principles of the USO – that the postal system be universal, affordable, timely and accessible in providing the quality delivery of mail and parcels to all Canadians and businesses across the country. What is not clear, or agreed upon, is what exactly each of the ingredients means and how they should be realized. For example, how long should it take for a letter to go from Town A to Town B? Should delivery be to the door, to the address, to the road, to the town, to the area? How much should it cost to mail a letter or parcel? How should mail be delivered? How many days a week should there be delivery?

Pursuing the USO requires that Canada Post develop and maintain a network comprising mechanisms, processes and facilities to pick up, sort and deliver mail and parcels, and to give citizens and businesses access to the postal system. It would seem reasonable to assume that this network will include a range of ingredients from mailboxes and post offices, to letter (delivery) boxes/units and sorting plants. By extension, then, the infrastructure of the postal system is part and parcel of the USO – but this, too, generates considerable uncertainty as to the precise character, ingredients and extent of the postal network. How many mailboxes should there be and how close should they be to Canadians? How many post offices should there be and how should they be distributed?

Finally, it is not clear whether the USO implies a limitless financial commitment to attain it, although it is clear that the financial costs of the USO will vary depending on how the USO is defined and operationalized. When Canada Post was created, Parliament legislated it to function on a financially self-sustaining basis and signalled its intention to no longer fund the postal service from general operating funds. The legislation thus reflected very clearly the user-pay principle. That is, henceforth the postal user, rather than the taxpayer, would pay for the postal service. This point will be addressed below, but one notes that the traditional approach to financing the USO was by providing guaranteed revenues through an exclusive privilege to the post for lettermail (a monopoly). It was understood that, in return for the exclusive privilege, the price of the lettermail service would be made affordable by guaranteeing that the price of the service would be the same – regardless of the distance the letter travelled. What is always open to consideration is what the scope of the exclusive privilege should be: lettermail weighing less than 50 grams? 100 grams? 250 grams? 500 grams? It has varied internationally and over time. In Canada, for example, the exclusive privilege covers lettermail weighing less than 500 grams. Other questions include: How large (or small) should the exclusive privilege be? What is the appropriate price for services under this monopoly condition?  

(ii) The USO in practice

In broad, general terms, the USO in Canada today involves the following:

• Any Canadian should, through the postal system, be able to communicate, transact business with any other Canadian, and send or receive a parcel, book, magazine, periodical or newspaper to each and every address;
• There should be a set of national collection, delivery and access networks that allow this to be realized in a timely fashion; and
• This service should be provided at reasonable service standards and at affordable and reasonable prices.  

These are the principles upon which the Canadian postal system was founded and to which Canada Post is held responsible. It is the Advisory Panel ’s view that the USO is the core business of Canada Post. Moreover, it also believes that the expectations around this core business must be clear and specific.

The Advisory Panel believes that it is appropriate and timely for the government to specify each of these ingredients in a clear and reasonably concrete way. It believes this because there is such uncertainty in Canada about what these principles mean operationally, particularly given changing demographic, competitive and technological environments. The Advisory Panel will suggest that the specification of USO goals in practice should be captured in a kind of Service Charter between the Government of Canada and Canada Post – with the explicit requirement that this charter be reviewed from time to time. This Service Charter would essentially become a contractual understanding between the government and Canada Post, setting out their mutual understanding of and expectations for the USO. This would become a public document, posted on the Canada Post website and accessible to all Canadians and postal customers.

What follows is a presentation of some elements that the Panel believes could form the basis of this discussion between Canada Post and the government.

Service: delivery standards

The service dimension of the USO is one area where the government has already specified its expectations for Canada Post’s delivery standards. The principle here is both a general one (quality) and a concrete one (service levels should be the same for communities with the same general characteristics). Canadians seem generally satisfied with the two-three-four-day lettermail delivery standard (two days locally, three days regionally, four days nationally). The Advisory Panel believes that it should remain in place and that Canada Post should continue to monitor and report on its performance against the standard in its annual report.

Service: five-day delivery

The conventional practice in Canada is for mail delivery to take place within a five-day delivery environment.

The Advisory Panel is aware that there are practical and/or financial limits to delivering mail to every address five days a week, particularly in remote areas of the country. Some countries have established an approach by which the post guarantees that a certain (very high) percentage of the population receives daily service, and segments of the remaining population receive service a certain number of times a week. The Advisory Panel suggests that Canada Post investigate such an approach for use in Canada for the government’s consideration. The Panel further suggests that the list of those areas of the country that do not receive mail delivery five days a week should be approved by the government, made public and reviewed regularly.

Delivery mode

A principle of the USO is that mail and parcels should be delivered to every residential and business address in Canada, regardless of location. In a country Canada’s size, this is especially daunting, not only because of geography but also because of the apparent addition of approximately 200 000 new mailing addresses a year. Canada Post uses a variety of different mechanisms to make these deliveries. Servicing this delivery network is a pressing operational matter for Canada Post, notwithstanding that the use of ‘community mailboxes’ rather than door-to-door delivery has been standardized in all new urban and suburban neighbourhoods.

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Source: Canada Post Corporation

The Advisory Panel believes that the historical service mechanisms for delivery to individual homes – for example, letter carriers going door-to-door or delivery to the end of laneways – should always be open for reconsideration in light of changing demographics and technology. Many countries establish a formula or process by which the post establishes the appropriate delivery mode for different sets of conditions. Canada Post should continue to develop and implement the most appropriate delivery approaches to achieve its USO. If changes to delivery modes are contemplated, the Advisory Panel believes that the list of affected communities/customers along with an implementation plan and a process for discussion of the plan with the affected communities/customers should be discussed with government, before being made public, and that this list should be reviewed and updated regularly.

Price

As is the case today, the basic lettermail rate for letters weighing less than 30 grams should not vary across the country, regardless of the distance travelled. This rate should continue to be determined by a formula set in regulations and approved by the government.

The setting of the price for other products within the exclusive privilege (letters and small packets weighing between 31 and 500 grams) should continue to be determined through the established regulatory process and approved by the government.  

Finance

The government has established the principle that the users of the postal service, rather than the taxpayers, should pay for the postal service. Within this framework, Canada Post’s exclusive privilege over lettermail is the financial underpinning of the USO. As part of the new Service Charter that the Panel will propose, the government should examine the precise scope of the exclusive privilege regularly, in light of changing market conditions and postal costs and productivity, as well as with regard to any changes in its USO definition or practice. The Advisory Panel will recommend the maintenance of the existing level of exclusive privilege with the exception that outbound international mail should no longer be part of Canada Post’s monopoly.  

The retail network

A principle of the USO is that all Canadians and all businesses should have access to the postal service, regardless of their location. This requires Canada Post to maintain a network of postal outlets across the country, where Canadians can purchase postal services, drop off and collect parcels, and so on. There are operational challenges to attaining this USO objective and how Canada Post addresses these challenges has been occasionally controversial particularly with regard to the use of privately owned dealer outlets and the closing of traditional post offices owned and operated by Canada Post.

While it would appear that this controversy has more or less played itself out in urban areas, a remaining and pressing concern is the location of post offices and dealer outlets, particularly in outlying, rural and remote regions. There will be a separate discussion of the rural postal network in a later section of the report.

(iii) Public policy objectives

Public policy objectives (PPOs) are postal policy objectives that are determined by the government, but which lie outside of the scope of the USO. The Advisory Panel believes that it is important to make a clear distinction between them.

Government Free Mail and Materials for the Use of the Blind

Two programs, Government Free Mail and Materials for the Use of the Blind, are required to be provided by Canada Post under the Canada Post Corporation Act. Canada Post currently receives a yearly appropriation of $22.2 million for providing these services.

With respect to the former, the Act recognizes the importance of communications between Canadians and their federal government by providing for free mailing privileges between Canadians and the Governor General, Members of Parliament (MPs), the speakers of the Senate and the House of Commons, the Parliamentary Librarian, the Ethics Commissioner and the Senate Ethics Officer. Members of the House of Commons are also allowed up to four free householder mailings to their constituents in any calendar year. In addition, Canada Post provides MPs with a highly discounted rate for unaddressed mail over and above their four free mailings. This rate has been in effect since 1995.

The practice of offering free mailing privileges for Materials for the Use of the Blind began in 1898. The obligation that literature for the blind be exempt from all postal charges is part of the Universal Postal Union’s (UPU) Convention. Conditions for the free mailing privileges are set out in Canada Post’s regulations.

Publications Assistance Program (PAP)

The Government of Canada’s PAP is administered by the Department of Canadian Heritage, in partnership with Canada Post. The program provides for subsidized postal distribution costs for eligible Canadian publications. Canada Post has been involved in the distribution of Canadian publications since before Confederation. As the policy authority, the Department of Canadian Heritage is reviewing the PAP.

Food Mail Program

Canada Post provides commercial air freight service for food shipped to a number of northern communities under the Food Mail Program, which is administered by the Department of Indian and Northern Affairs. Under this program, shipments of fresh food are sent to designated northern points at rates subsidized by the government, thereby promoting good health and eating habits for northern residents.

Library Book Rate

The Library Book Rate was introduced as part of the Publications Assistance Program in 1939. Canada Post administers the program through the provision of lower-than-cost postal rates for library books sent between authorized senders and receivers, primarily in rural Canada. Since the Library Book Rate is no longer considered part of the Publications Assistance Program, there is currently no federal department identified as the policy authority for this program.

Canada Post has historically been assigned responsibility to deliver on these PPOs, sometimes by custom and convention and sometimes as a result of conscious government decision. There has been a tendency to simply blend these PPOs into the corporation’s USO and to anticipate that they would be financed through the post’s general revenues. For the most part, the Advisory Panel does not subscribe to this point of view.

First, Canada Post has been directed to undertake its responsibilities in a financially self-sustaining way. The PPOs impose an inappropriate financial burden on CPC. Second, Canada Post was also created within a user-pay paradigm, one in which postal users – not taxpayers – pay for postal services. As a matter of principle, Advisory Panel believes that the cost of PPOs should be borne by the government, that is, by those departments with policy responsibility for the programs these PPOs support, and not by general postal users.

There are a number of PPOs that, according to Canada Post, have not been assigned appropriate financial support. These include Government Free Mail (outlined in the Canada Post Corporation Act), and assistance for publications, library books, food mail and parcels to the north. Free mail service for Materials for the Use of the Blind is a separate category, as this is a national postal obligation associated with membership in the Universal Postal Union and is outlined in the Canada Post Corporation Act. Canada Post currently receives a yearly appropriation of $22.2 million for providing Government Free Mail and Materials for the Use of the Blind. Canada Post has indicated that this amount has not been reviewed in many years and does not take into account fluctuations in volumes or changes in the types of mail being sent.

Canada Post notes that Government Free Mail has been at most partially funded, and recent figures indicate that it is a service increasingly used by parliamentarians. In addition to the free mailings, Members of Parliament can send unaddressed mail at a highly discounted rate, which the Advisory Panel understands has not been reviewed since the mid-1990s. In its submission, Canada Post indicated that it had foregone $12 million in revenue for Government Free Mail and Materials for the Use of the Blind in 2007.  

Pursuant to an agreement with the Department of Indian and Northern Affairs, the Government of Canada compensates Canada Post for the difference between the corporation’s cost of shipping eligible goods under the Food Mail Program and the applicable postage paid by shippers. The Food Mail Program to the North has been reasonably funded on a user-pay basis and should continue to be fully financed in this way. It is noted, however, that in its submission Canada Post believes it should be entitled to commercial mark-ups and it estimates that it should be entitled to recover an additional $9 million in revenues based on the 2007 program.

The Publications Assistance Program (PAP) is a public policy objective to which Canada Post provides funding under a directive from the government. While Canada Post as provider of postal services to all Canadians has been delivering publications since before Confederation, it does not have the mandate to promote Canadian culture by subsidizing postal rates for Canadian publications. That is the responsibility of the Department of Canadian Heritage. The Advisory Panel believes that Canada Post’s funding to the PAP should end in March, 2009 as indicated in the government’s directive to Canada Post.

In its submission, Canada Post indicated that there is no formal requirement for Canada Post to provide the Library Book Rate (LBR), but public pressure to do so has been historically strong. There are ongoing appeals from the library community to keep the rate low and to expand the scope of the LBR to include non-book material. Canada Post estimates foregone revenue for the program for 2007 was $6 million. The Advisory Panel was not able to discover an obvious department to support this program.

Conclusion

As a matter of principle, Canada Post should not be required to subsidize or otherwise pay for those public policy objectives that are not an explicit part of the USO. If a government department or agency proposes public policy activities like the ones above, the government should open the service to a competitive bidding process on a contract basis where such options exist.

II – The modernization of Canada Post

In the Terms of Reference assigned to the Advisory Panel, the Minister presents a number of principles that direct us to consider Canada Post’s physical capability and capacity to deliver as being critical to the strategic review:

• Canada Post must maintain a universal, effective and economically viable postal service; and
• Canada Post is to continue to operate in a commercial environment and is expected to attain a reasonable rate of return on equity. 

Moreover, the Terms of Reference (IV. Scope", Part A – Market and Competition) direct the Advisory Panel to ask how technology, competition and customer demographics and needs have shaped the postal market and the various products within it.

When discussing modernization, one should distinguish that formally, Canada Post is one segment of Canada Post Consolidated, which also includes Purolator.

For the Canada Post segment to be effective, it must have adequate tools and processes to allow it to carry out its required functions and responsibilities – including its USO obligations – to some degree of effectiveness in terms of efficiency, cost, timeliness and accuracy of service. Moreover, it needs some substantial capacity to use the available modern technology and techniques to control its major cost drivers and to remain economically viable. Similarly, given that the postal system exists in a competitive communications environment, Canada Post should have a degree of technological capacity and service that will allow it to meet commercial, customer and competitive standards as well as product and service expectations in its market.  

A good part of the story of modern postal evolution can be told through a description of the successive applications of technology to deal with urbanization/suburbanization and population growth. These developments have been persistent and relentless, and made the postal system an increasingly complex, costly and technological affair. In the latter part of postwar period, the Post Office Department in Canada nearly collapsed under the weight of the increasing volumes of mail generated by economic and population growth, and by the complexity associated with the expansion in the number of addresses and delivery points. No amount of additional human resources would have been sufficient to contend with these pressures in an economically rational way. The application of new technology to the postal process – the postal code, letter-sorting machinery, optical scanners, and modern sorting plants – allowed the modern post to contend with increasing volumes and complexity. Indeed, it is fair to describe the postal sector as a ‘network’ or infrastructure industry, which uses a high degree of advanced plant and equipment to run its business.

Canada was in the vanguard of posts in the 1970s, when the country undertook a postal modernization program. The program, which was not without growing pains, saw Canada invest hundreds of millions of dollars to modernize its plants and sorting equipments. With that wave of modernization in the 1970s, Canada set a high international standard for modern postal operations. One result of this modernization initiative was that labour costs as a proportion of total expenditures fell from 75.4% in 1981 to 68% by 1991 ^{[ 1 ]}. Alas, that was the last wave of transformative postal modernization in Canada. Many posts in Europe and around the world – and private firms in the courier and express business – have adopted the latest generation of postal technology, from bar code readers to sophisticated sorting equipment that can sort letters to the postal route, and track-and-trace technology that allows customers to follow their products in real time. These competitor developments have left Canada Post behind, desperately trying to maintain and patch up an aging technological infrastructure while falling behind in competitive, commercial and service terms.  

Canada Post’s network is large and elaborate, including, among other things:

• 21 mail processing plants
• 500 depots in over 300 physical locations
• 1850 mail service carrier routes
• 16 700 letter carrier routes
• 33 000 street letter boxes
• 60 000 relay boxes
• approximately 120 000 community mailboxes (representing about three million points of call)
• 6600 rural and suburban mail carrier (RSMC) routes
• 72 500 Canada Post employees (includes full-time/part-time and subsidiaries).  

Canada Post discussed its modernization and financial sustainability needs and aspirations with the Advisory Panel over the course of the strategic review. The Advisory Panel finds Canada Post’s case with regard to its obsolescence issues and for modernization to be compelling.

Most of Canada Post’s infrastructure investment has focused on maintaining its operations – from replacing and improving minor plant equipment and operating systems, to information systems/information technology infrastructure, to ongoing replenishment and maintenance of materials handling equipment, street furniture and vehicles.

Canada Post reports that much of its infrastructure is well past its useful lifespan and that many of its buildings are over 40 years old and in need of significant upgrading. Independent third-party experts have verified this, and the Advisory Panel would concur, after having visited a number of plants in Montreal, Ottawa, Toronto and Vancouver. The Advisory Panel also viewed modern postal plants in the United States and those of Canada Post’s private sector competitors. In the view of the Advisory Panel, there appears to be no doubt that Canada Post has significantly under-invested in its infrastructure, both in terms of dealing with obsolescence issues and in terms of keeping its plants and equipment current. It can be argued that under-investment in infrastructure has been endemic among government-owned enterprises, where scarce resources and the imperative to deliver services as cheaply as possible have trumped investments aimed at future results. Regardless of its causes, under-investment has rendered Canada Post unable to take advantage of the potential benefits of current technologies to modernize its operations to the benefit of its employees and to its customers. The Advisory Panel concurs with Canada Post’s view that it has significant obsolescence issues that must be addressed in the reasonably near future to bring its infrastructure up to an acceptable standard and allow it to continue to fulfill its mandate.

Canada Post is without a doubt lagging behind most other posts in terms of technology currency. This is in sharp contrast to earlier periods, when Canada was a world leader in the adoption and effective use of innovative technologies. Many, if not all, of the major postal services reviewed by the Advisory Panel have modernized, or are in the process of modernizing, their operations to take advantage of the benefits that current technology has to offer to both the posts and their customers. Based on its reviews of and discussions with other posts abroad, the Advisory Panel believes that Canada Post is significantly lagging behind its national competitors in the adoption and deployment of modern letter and parcel handling and information management technologies. As a result, Canada Post is not able to realize the benefits and opportunities that modern and up-to-date infrastructure would facilitate, including:

• Increased productivity and control of costs;
• Improved worker health and safety;
• Improved customer service;
• Improved ability to respond to customers’ evolving needs; and
• Increased ability to be self-sustaining in the future.

It will take a significant level of investment to modernize and standardize Canada Post’s plants, equipment and processes; to introduce current technology in the areas of database management, letter and parcel visibility and tracking; and to improve and enable its e-business potential. Current estimates are in the order of $3 billion over the next seven years, in addition to the $200 million on average that it is currently spending for ongoing maintenance and normal infrastructure programs annually. Canada Post has begun to implement its modernization plans with the replacement of its Winnipeg facility, at an estimated cost of over $65 million. Canada Post has also developed plans for the remainder of its network.

The Advisory Panel is of the view that the concepts informing Canada Post’s modernization plans are sound, and that the corporation needs to proceed in an expedited manner if it is to attain long-term success. The Advisory Panel agrees with Canada Post that it must address and expeditiously deal with its obsolescence issues and introduce current technologies. This will permit the corporation to meet the expectations placed on it by customers and its shareholder to be competitive and financially self-sustaining.

If the benefits of the modernization program are to be forthcoming, a principled commitment to a multi-billion dollar modernization process brings a number of complementary issues into clear focus. These include:

• The nature and expectations associated with the USO;
• Financing and financial self-sufficiency;
• Governance issues in the relationship between the shareholder and Canada Post; and
• Canada Post’s relationship with its labour force.  

The ultimate purpose of the modernization program is to maintain and extend Canada Post’s capacity to pursue its USO obligations in a satisfactory and effective manner. As discussed in the previous section, the USO in effect requires these infrastructure investments to address obsolescence and to modernize, as it is simply inconceivable that Canada Post can continue to attain the USO without a modern, up-to-date and efficient plant, equipment and electronic infrastructure. Without it, service levels will deteriorate, volumes will be lost, prices will rise, and Canada Post will lose ground to its competitors. In this context, it is imperative that the USO be clarified, well-defined and well-understood by all parties – Canada Post, its board, the government (shareholder) and Canadians. And, in the Advisory Panel ’s view, a clarified USO must include service standards and rural expectations.

Financial issues will be examined thoroughly in the next section. For now, the Advisory Panel notes that a commitment in principle to a multi-billion dollar postal transformation has numerous financial requirements and implications, if the transformation plan is to be executed successfully and without damaging Canada Post’s financial sustainability. As will be discussed, these requirements and implications include increased access to capital; a revamped pricing policy; a revised dividend policy and profit expectations. The Panel also believes that it is imperative that obsolescence and modernization issues must be dealt with separately and apart from the issues related to pension fund requirements.

This capital investment will put intense pressure and expectations on the relationship between the shareholder and the corporation. This issue will be examined thoroughly later in the Governance section of the report. For now, the Advisory Panel notes that for the modernization plan to be successful, there has to be a clear understanding between the government and Canada Post’s Board of Directors regarding their respective roles, responsibilities and accountabilities regarding the development, approval, financing, execution and communications needs related to the plan. A key theme of this report is the evolution and position of Canada Post on what might be termed a ‘corporate autonomy continuum,’ and a multi-billion dollar transformation plan needs clarity on this question.

One other very significant factor that flows from postal modernization and transformation is the response of Canada Post’s labour force to the introduction of new technology. This does not only include the reaction of the postal unions. It also includes the impacts of new technology on individual workers themselves. Over and above the possible introduction of new products and services, the basic reasons for introducing new technologies are to do business more efficiently (i.e. improve productivity) and to process large volumes at acceptable costs, while making the working environment healthier, safer and even more environmentally friendly.  

If the story of modern postal evolution can be told through a description of the successive applications of technology, then a large chapter in that story has been the strong union reaction to these technological changes. These reactions were predominantly to the reduction and/or redesign of jobs. Indeed, recent modernization in many posts abroad reinforces these outcomes. Canada Post’s modernization plan proposes to minimize the impact on its present work force by anticipating the non-replacement of employees who retire or leave voluntarily. The Advisory Panel suggests that Canada Post should be mandated to further review its modernization plans, both to improve productivity and adjust staff complements where feasible as a result of modernization initiatives. This would be done to improve service levels and general operational efficiencies.

Increased competition from electronic communication and new competitors have combined to weaken postal growth prospects, so that Canada Post must limit its costs and increase its productivity and competitiveness if it is to survive. Government must recognize that Canada Post’s survival and prosperity will be heavily determined by the degree to which the corporation can achieve productivity improvements, effect postal price changes, and/or (potentially) alter USO service and quality levels. A principled approach to a 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 believes that dealing with these employee impact issues in a proactive manner by all parties is the only practical approach, if the benefits of modernization and the longer term sustainability of Canada Post are to be realized and the impact on individual employees is to be dealt with in a fair and equitable manner. The Advisory Panel has heard Canada Post’s request that a third party be retained by the government to assess whether elements of its existing labour agreements inhibit the modernization plan and thus Canada Post’s future self-sustainability.

The Advisory Panel has also heard CUPW’s request that the Panel not pronounce on the impact of present labour agreements from less than a fully informed position. In this context, and in considering a proactive approach to modernization’s impact on labour as well as Canada Post’s future self-sustainability, the Advisory Panel will recommend that the government pursue Canada Post’s suggestion to review the impact of current labour arrangements from the perspective of their impact, positive and negative, on the long-term sustainability of Canada Post. At the same time, Canada Post should be instructed to undertake an assessment of its modernization plans from the perspective of how these plans will be affected by a clarified USO, if at all.  

In a similar spirit, the Panel supports the idea of an employee share ownership plan, as a way to heighten employees’ involvement and ownership of the process of modernization.

III – Financial self-sustainability

In the Terms of Reference assigned to the Advisory Panel, the Minister presents principles that direct us to consider Canada Post’s financial self-sustainability as a central concern for the strategic review:

• Canada Post must maintain a universal, effective and economically viable postal service; and
• Canada Post is to continue to operate in a commercial environment and is expected to attain a reasonable rate of return on equity.  

Moreover, Section D of the Terms of Reference directs the Advisory Panel to examine Canada Post’s financial and performance targets, and to evaluate whether the 1998 Multi-Year Policy and Financial Framework remains appropriate, given changed market, commercial, technological and international conditions, and given the USO and modernization issues that have been discussed earlier in this report.

Canadian governments have expected Canada Post to fulfill its operational and USO mandates without any public subsidy. That is, Canada Post has been instructed to be financially self-sufficient and to pay out annual dividends, while fulfilling its USO obligations. Canada Post’s operational and financial mandates are embedded in the 1981 Canada Post Corporation Act, which sets as an objective for the corporation “the need to conduct its operations on a self-sustaining financial basis while providing a standard of service that meets the needs of the people of Canada and is similar with respect to communities of the same size.”

Canada Post does not receive government appropriations to support its USO commitments. It must rely on the net income it generates from its operations, supplemented by money it can borrow at acceptable terms, to support its ongoing operations and to finance necessary investments. 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 become increasingly threatened. Changes in the market and society compound this challenge, threatening Canada Post’s competitiveness in important, traditionally profitable areas and creating demand for services it can potentially meet in new emerging niche markets. Canada Post must have the financial resources and flexibility to respond to these evolving consumer preferences and technological changes and to maintain its competitiveness.

It is evident, then, that Canada Post must attain a degree of financial self-sustainability if it is to successfully pursue its obligations over the long term. This is a bedevilling question for the Advisory Panel – and for policy-makers: What does financial self-sustainability entail for a Crown corporation, particularly one with numerous social obligations and expectations?

Following the completion of the 1995 review of Canada Post’s mandate (Radwanski Review), the federal government entered into a quasi-contractual agreement with Canada Post in 1998 – the Multi-Year Policy and Financial Framework . A key element of that agreement was the establishment of specific financial performance targets that provided benchmarks of what was then considered to represent financial sustainability for the company. Some submissions received by the Advisory Panel have raised concerns that defining financial sustainability in these terms fails to take into account the special nature of a Crown corporation ^{[ 2 ]}. Some might argue that a Crown corporation like Canada Post does not need to give the same priority to achieving commercial goals, as it is also expected to fulfill significant social policy mandates that a private sector company would normally not pursue.

The Advisory Panel is of the view that there are numerous reasons why benchmarks of financial performance should be set for Crown corporations:

• They provide a metric for accountability and performance;
• Companies like Canada Post must be able to generate sufficient resources to cover their ongoing operational costs;
• In addition, they also need to generate adequate profit margins on average, to buffer the corporation from periodic financial and economic downturns that could otherwise threaten its ability to fund essential operations;
• The maintenance of adequate profit margins on average is also needed to help cover the costs of necessary acquisitions, investments including infrastructure renewal and upgrades; and
• Adequate profit margins are required to meet demands by the government to help support, via dividend and tax payments, general public expenditure priorities.  

(i) The current financial situation

Canada Post, according to its 2007 Annual Report, has attained profitability for the last 13 years. However, it has recently been underperforming against the consolidated financial targets set for it in the 1998 Financial Framework. Appendix G provides more details on the historical financial information.

Canada Post was initially able to make significant progress in meeting the targets mandated in the 1998 framework. By 2004, the corporation had met or exceeded virtually all the financial targets set out in the Framework, with the exception of the debt-to-capital ratio, and began to pay out the equivalent of 40% of its net income to the government in the form of dividends (Table 6).  

Table 6: Performance in meeting the Financial Framework targets

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Source: Canada Post Annual Reports
Note: Items in bold represent cases where actual performance meets or outperforms the framework target.
         Consolidated earnings refer to the entire range of the Canada Post Group of Companies.

More recently, however, Canada Post’s ability to meet its financial targets has eroded. Its return on equity peaked at 15% in 2005, falling back to 3.8% in 2007, a figure that is substantially below the framework target of 11%. Likewise, the ratio of operating costs to revenues rose from 96.2% in 2005 to 98.3% in 2007, and now stands above the target of 97% set in the Framework. Canada Post’s recent inability to meet its Financial Framework targets reflects the growing challenges it faces with both operating costs and revenues:

• Canada Post’s consolidated cost of operations grew at an average annual rate of 3.2% over 2006-2007; and
• Consolidated revenues from operations, on the other hand, only grew at an average annual rate 2.5% over the same period.  

The divergence in the growth rates between operating costs and revenues is even larger when looked at from the perspective of the Canada Post segment of the corporate group:

• Revenues from operations grew at an average annual rate of only 1.7% over 2006-2007; and
• In contrast, cost of operations grew at an average annual rate of 2.9%.  

(ii) Revenue challenges

On the revenue side, one can point to four particular issues that have weakened the capacity of Canada Post’s revenue stream to contribute to financial self-sustainability:

• The price cap formula embedded in the 1998 Framework;
• The weakening of the lettermail market in the face of market and competitive challenges;
• The lower revenue associated with compensating volume increases in competitive products; and
• The weakening in the value of the exclusive privilege that pays for the USO and contributes to the PPOs.  

The 1998 framework imposed a price cap formula for the basic domestic letter rate, whereby the price of stamps on domestic letters weighing no more than 30 grams could increase by no more than two-thirds the rate of increase in the Consumer Price Index (CPI). Both Canada Post and CUPW have told the Advisory Panel that the formula used in this price cap does not appropriately reflect trends in the real costs that Canada Post must face. Assuming that stamp prices had been allowed to increase at a rate equal to that of the CPI, and assuming this had not had any impact on consumer demand for lettermail services, the present price of a stamp would be 62 cents, not 52 cents, and Canada Post would have generated hundreds of millions in extra revenues over the last decade.

Structural and competitive changes in the market have weakened demand for mail products. In 2003, the volume of transaction mail (or lettermail) delivered by Canada Post accounted for almost 50% of the total volumes in its combined business segments delivered in that year (Table 7). The annual average rate of growth of this segment fell to 0.3% over 2004-2007 and the amount of transaction mail delivered actually fell by 1.6% in 2007. The end result was that transaction mail’s share of total volumes fell to just below 46%.  

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Calculated from 2007 Annual Report

Notwithstanding the lettermail trend, there has been growth in the physical volume of pieces transferred by the corporation in competitive markets. In volume terms, the growth of products delivered peaked in 2006, at a growth rate of 3.7%, and slowed in 2007, when the year-over-year growth rate decelerated to 1.5%. The slowdown in the volume of transaction mail has been offset, to an extent, by acceleration in the growth in other areas, such as direct marketing mail. The number of pieces delivered through direct marketing rose from 47% of the corporation’s combined total deliveries in 2003 to almost 52% in 2007. However, these compensating volumes have not translated into adequate or equivalent compensating revenues. As Canada Post notes, it takes almost two pieces of 35-cent addressed advertising mail, or seven pieces of eight-cent unaddressed advertising mail, to replace one piece of 52-cent regular mail. The structural shifts in the composition of pieces delivered by Canada Post have eroded the corporation’s revenue generating base.

The universal service obligation and public policy obligations impose considerable costs on Canada Post. Traditionally, Canada Post has relied on its reserve (monopoly) markets to generate the revenues needed for its USO and policy obligations. However, changing market preferences are eroding demand in the traditional reserve areas, so that this support is weakening. Canada Post has reported to the Advisory Panel that a financing gap of $0.5 billion now exists between the revenues generated in its reserve area and the combined costs of fulfilling its USO and public policy obligations.

(iii) Rising costs

Canada Post also faces the challenge of containing cost pressures. Canada Post’s consolidated operating expenses grew at an average annual rate of 4.1% over 2003-2007. The rate of growth in consolidated operating costs has been accelerating over this period, however, rising from a growth rate of 2.7% in 2003 to 6.5% in 2006. Canada Post had some success in reversing this acceleration in 2007, tightening control over administrative and discretionary costs, lowering pension expenses, and containing rural mail delivery costs. As a result of these developments, operating costs in 2007 (at $7346 million) were $125 million lower than planned. Much of Canada Post’s consolidated expenses are fixed costs, determined by the USO and implementation of its public policy objectives, rapidly growing labour costs, and an aging capital stock. Without underlying structural changes, there are limited opportunities to control costs over the long term though discretionary measures.

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Sources: Canada Post Annual Reports

There are three issues that are of particular note in this regard:

• Constraints on managing USO costs;
• The high cost of labour; and
• Pension costs.  

During the strategic review, Canada Post noted that the moratorium on the closing of rural post offices has had the effect of leaving rural services untouched. This puts financial pressure on Canada Post. While 60% of its postal network is located in designated non-urban areas, 80% of Canadians live in urban areas. A large share of the costs incurred by these rural post offices is fixed, and is certainly no lower than if the post office were in an urban area. Limited rural demand, however, means that the revenues generated by the current rural network are often insufficient to cover the costs. This is one example of how the choice of instruments to deliver the USO has financial implications for Canada Post. The corporation often finds itself inhibited from altering these instruments in order to contain costs.

Canada Post’s operation is relatively labour intensive, so that its changing labour costs have a significant impact on trends in its overall operating costs. Growing salaries and benefits, combined with contractual provisions that appear to limit labour flexibility, have seen a growth rate in labour costs that has outpaced total operating costs. This provides a formidable challenge for Canada Post’s self-sustainability.  

Canada Post’s pension plan is regulated under the federal Pension Benefits Standards Act. The plan is subject to various actuarial valuations, including the need to make determinations of required funding and expenses on both an ongoing and a solvency basis. The plan is more than fully funded on an ongoing concern basis. However, variations in the obligations it faces to make sure that the pension fund is continually funded on a solvency basis can be dramatic. A valuation on a solvency basis considers whether Canada Post has sufficient resources in the pension fund to generate enough income to cover the plan’s liabilities should the corporation be wound up. Estimates of the necessary funding level using a solvency basis can fluctuate significantly with changes in discount rates and market valuations. Canada Post argues that it is unnecessary to insist that the pension plan should be funded using a solvency valuation because the corporation cannot be wound up without an Act of Parliament, and the likelihood of this happening is practically non-existent.

(iv) The modernization challenge

Canada Post’s current plant and equipment are of pressing concern, particularly in the context of the discussion of financial sustainability. Much of Canada Post’s capital stock is old and inefficient. Most of its 21 processing plants are over 40 years old. Moreover, its sorting equipment cannot operate as efficiently as it should or provide the timely parcel tracking services and online mailing tools increasingly demanded by consumers. Failure to update its aging and inefficient buildings and equipment risks compromising employee health and safety, increasingly aggravating operating costs over time, and adversely affecting the environment.

Ensuring financial sustainability for Canada Post over the coming years will require major investments to modernize the corporation’s operations. Canada Post has initiated a renewal in its capital stock with a program of building upgrades and replacements that, combined with investments in new sorting equipment, will reduce significantly its reliance on manual mail sorting.

Replacing obsolete capital equipment will generate significant annual cost savings. If successful, the postal modernization program will also increase the corporation’s competitiveness and ensure that the USO remains adequately financed. Estimates by Canada Post suggest that the modernization plan could generate annual savings beginning prior to 2015 in an eight-year pay back.

In order to carry out this modernization plan, Canada Post will require increased and substantial access to financial resources. The cost of the planned postal modernization program is estimated to be in the order of $3 billion, over and above the ongoing investment costs needed to maintain normal operations. The low profit margins and borrowing levels that Canada Post currently experiences will challenge its ability to attain the financing required to carry out the necessary capital investments. It is estimated that there will be a funding gap of around $1.7 billion unless Canada Post borrows these funds. In order to fill this financial gap, additional flexibility on debt levels will be needed. In-house adjustments and institutional changes will also be needed to enhance Canada Post’s profit margins over the short term to help fill the gap and to maximize the corporation’s ability to secure additional debt at favourable terms.  

(v) Financial targets and the 1998 Financial Framework

After the completion of the Radwanski mandate review, Toronto Dominion Securities Inc.  and Dresdner, Kleinwort, Benson (referred to as TDSI) were engaged by the government to assess Canada Post’s financial position. In 1997, TDSI proposed a number of financial targets for Canada Post that, if attained, would allow Canada Post to be financially self-sustainable, assuming a rate of increase in stamp prices for basic lettermail equal to two-thirds of the rate of change in the CPI.

TDSI’s report defined financial self-sustainability as that condition in which Canada Post’s financial situation would be consistent with that of a private sector firm operating in a similar market. In practical terms, it interpreted this to mean that Canada Post should be able to borrow in public markets under terms consistent with a BBB credit rating without a government guarantee. Moreover, TDSI in turn sought to determine the return on equity and dividend levels that Canada Post would need to maintain, in order to attract equity investors while still fulfilling its public policy mandate.

TDSI’s proposed targets provided a starting point for the development of the 1998 Financial Framework Agreement between the Government of Canada and Canada Post. The final version of the Framework was influenced by the TDSI study, but the final targets differed somewhat from those that TDSI had recommended. The Advisory Panel believes that this reflected the government’s view that Canada Post’s Crown corporation status would make it difficult to institute a framework consistent with TDSI’s recommendations. Moreover, there was considerable change and resulting uncertainty about the postal economic environment that led the government to recast TDSI’s 1997 proposed targets.

As noted earlier, internal and external factors have made the financial targets laid out in the 1998 Financial Framework difficult to achieve in recent years.

Generally, the Panel believes that the circumstances that motivated the government in 1998 have changed considerably, so that it is appropriate that the 1998 Multi-Year Financial and Policy Framework be re-considered and updated. This would not be an unusual step. Peer postal administrations which operate within similar Financial Framework s have a periodic renewal process in place for financial targets. More specifically, such a change is warranted because:

• The business environment has changed considerably over the last decade, and the recent financial crisis has compounded this issue;
• Canada Post functions in increasingly competitive and changing market and operating conditions – from the loss of core market because of electronic substitution to the increasing presence of international competitors in the era of globalization;
• Canada Post has a significant capital investment requirement to address obsolescence and modernization – to replace out-of-date equipment, to remove inefficiencies associated with aged facilities, to sustain service standards, and to retain competitive offerings;
• Canada Post faces escalating cost pressures within a restrictive price-setting regime;
• The current financial market turmoil will likely result in increased pension funding and loss of contribution holiday; and
• The current pricing regime limits revenue generation to recover costs and also to finance capital investment, and third-party financing is required as planned capital expenditures are greater than Canada Post’s annual free cash flow.  

Moreover, the financial targets in the 1998 Framework have in most cases lost their original value or purpose or have become inappropriate:

Earnings Before Interest and Taxes (EBIT)

• A target like this needs to be reviewed periodically for changes in business mix, financial markets, and the postal market;
• A fixed target does not allow for inflation, growth, or operating/pricing flexibility; and
• Significant changes have occurred in the past 10 years.  

Return on Equity (ROE)

• This target needs to be set in the context of capital structure and business risk;
• The ROE needs to be reviewed periodically for changes in Canada Post’s business mix and operating/pricing flexibility, financial markets, and the postal market; and
• Significant changes have occurred in the past 10 years.  

Dividend Payout Ratio

• At present, this payout ratio is inflexible and tied to ROE exclusively, rather than to the stage in which Canada Post functions in the business cycle;
• A lower dividend payout may be appropriate during periods of growth or significant capital investment; and
• The payout ratio does not consider services provided at off-market rates to the government.  

Debt-to-Capital Ratio

• The ratio should require the inclusion of capitalized operating leases as debt; and
• A fixed target does not provide the flexibility needed during an investment cycle.

Productivity Ratio

• This is not a widely recognized financial measure;
• The target does not provide for one-time costs (restructuring or integration), specific investment (modernization), or cost deferrals;
• It encourages short-term fixes over long-term strategic decisions to meet the target;
• The target does not consider the ability to change or to improve the cost structure; and
• Significant changes have occurred in the past 10 years.  

Stamp Price Increases

• An inflexible cost structure severely limits Canada Post’s ability to drive efficiencies;
• The CPI formula does not reflect the significant labour component of CPC’s costs nor the fuel and related transportation costs; and
• The current approach does not reflect capital renewal needs or requirements of the business.
   

(vi) Creating a Revised Financial Framework

In Part III of the report, the Advisory Panel will present the basic ingredients of a revised Financial Framework for Canada Post, for illustrative purposes. This can be viewed at Annex II. In conjunction with the new Service Charter, this would create a contractual framework between the Government of Canada and Canada Post. The remainder of this section will present the Panel’s considerations in creating a revised Financial Framework and the basic components or targets within it.

Background

In considering a revised Financial Framework , the Advisory Panel looked to and reviewed a number of successful peer postal administrations such as Austria, Australia, New Zealand and Sweden. An analysis of these postal regimes confirms the importance of a Financial Framework that guides those postal corporations to financial self-sustainability and provides an effective framework that includes provisions for renewal, implementation, and valuation. These regimes share a number of key components that were not part of the 1998 Financial Framework :

• The ability to set stamp prices;
• Frequent performance assessments;
• Repercussions for missed targets; and
• An annual review process to ensure that targets account for changing business and economic dynamics.  

The Advisory Panel looked to and reviewed sectors and companies with similarities to Canada Post, such as the telecommunications, pipeline and utilities, and courier industries. Canada Post has historically been compared to monopoly-like utilities such as pipeline and gas and electric utilities, as a large infrastructure, low-growth safe monopoly-like company with a social mandate in a regulated environment. However, technology and globalization have created an increasingly competitive environment for Canada Post, making it closer in appearance to a communication's company, as a large infrastructure firm with ongoing capital expenditure requirements functioning in a mature economic sector with competition in certain segments. Moreover, through its ownership of Purolator, Canada Post functions in the competitive courier market.

The Advisory Panel feels that a Financial Framework must also consider:

• Canada Post’s unique business risks and financial characteristics;
• The need to provide incentives to control costs;
• The requirement for periodic intensive capital expenditure programs and to remain technologically current;
• The sensitivity of Canada Post’s earnings to the economy and changing market dynamics; and
• The need for a strong investment grade rating from credit rating agencies.  

With respect to process, the Panel suggests that this revised Financial Framework be established within a collaborative process between the Government and the Board of Canada Post:

• The negotiation and implementation of the revised Financial Framework will likely require a significant transition period;
• Canada Post’s performance against the Framework’s target ranges should be reviewed annually with the government;
• Detailed explanations of performance and a resolution plan for failure to meet targets should be provided; and
• The target ranges proposed should be reviewed annually to determine if they are still appropriate, given the financial markets, industry and business of Canada Post.  

Components of the Revised Financial Framework

After reviewing and analyzing Canada Post’s financial situation, the Panel notes two important imperatives:

• Operating within its current conditions, Canada Post needs to generate at least $1.7 billion in incremental earnings or financing to meet the capital investment requirements of its modernization program. It is the Panel’s view that Canada Post will be challenged to generate sufficient cash to fund the modernization process; and
• The modernization program itself is a necessary but not sufficient condition for Canada Post to achieve and to maintain financial self-sustainability. Increases in stamp prices over and above that provided in the revised Financial Framework may be required.

The need for these incremental earnings provides a kind of ‘test’ or objective for financial self-sustainability, and gives direction to what a revised Financial Framework should establish – if the Financial Framework is to be a constructive instrument and not simply an empty, formal one. In this context, in order for Canada Post to be financially self-sustainable, it must be able to generate:  

• Sufficient cash flow to fund capital expenditures, working capital, and payment of dividends;
• An EBITDA (Earnings before interest, taxes, depreciation and amortization)/interest-expense ratio (explained below), such that a government guarantee would not be required to raise capital in the debt markets; and
• A commercially acceptable return on equity rate.  

In constructing a proposed revised Financial Framework , the Advisory Panel has focused on the following:

• A set of financial targets focusing on capital structure, profitability and dividend policy, which together provide an accurate and informative assessment of financial performance;
• A productivity target should be included, to demonstrate that there are positive results to the modernization plan; and
• Price-setting ability in the lettermail segment that is linked to Canada Post’s costs.  

The Panel also considered:

• Creating a framework that reflects the best practices of peer postal administrations;
• Creating a framework that combined/balanced the metrics of similar sectors – telecommunications, pipelines and utilities, and couriers;
• Encouraging efficiency and internal independence while providing flexibility;
• Requiring periodic assessment to ensure that changes in the operating environment and economic conditions are considered; and
• Establishing ranges for individual targets, to reflect the fact that market conditions change and Canada Post’s investment and performance needs also change. In Part III, the Panel presents a ‘dynamic’ framework, which presents different targets or metrics for each of three phases: the investment phase, the transition stage, and the steady state.  

The Financial Framework should be reviewed annually to ensure that target ranges are appropriate for the environment at any particular time. The Financial Framework should also be constructed in a way that reflects Canada Post’s changing capital investment and modernization needs, over a cycle of long-term investment. Management of the framework should be part of the annual budget and strategic planning process. The framework should be reviewed on an annual basis, with any changes requiring government approval. The operation of the framework will require detailed explanation and a specific action plan for failure to meet targets.

The primary financial targets focus on Canada Post’s capital structure, its target profitability, and the dividend policy it should pursue. Together, the Advisory Panel believes that these provide an accurate and informative assessment of financial performance and capacity.  

With respect to capital structure (which includes its operating leases), targets must support:

• Canada Post’s ability to obtain the required strong investment grade rating so that it will be able to access the debt capital markets; and
• Canada Post’s ability to set an appropriate level of recurring cash required to cover its debt and lease costs.  

Suggested New Financial Metrics and Indicators

TDSI was engaged as a consultant to the Panel. TDSI has an extensive history and involvement with the Government of Canada and Canada Post regarding financial performance indicators and monitoring.

Three metrics are proposed to assess Canada Post’s capital leverage potential and its liquidity. The first metric is the total debt to EBITDAR ratio. EBITDAR refers to ‘earnings before interest, taxes, depreciation, amortization and rent’. This metric is a very good indicator of financial performance and a good indicator of profitability. The debt-to-EBITDAR ratio demonstrates debt relative to cash flow. A ratio that is too low would indicate that Canada Post is underleveraged and a ratio that is too high is indicative of too much debt. The “Steady State” section of the revised Framework presents a ratio in the range of 2.5 and 3.5. The second metric is total debt to book capital, which also provides an assessment of how the firm is leveraging its capital. The “Steady State” section of the Revised Framework proposes a 45% to 55% ratio. When attained, these two ratios will support Canada Post’s case to have an investment grade appropriate to access the debt capital market.  

Canada Post’s liquidity can be assessed by the EBITDAR minus capex/interest ratio, where capex refers to maintenance capital expenditure. This ratio shows the ability of the firm to generate sufficient cash flow to cover interest expense after maintenance capital expenditures are made. The ratio reflects an estimate of the recurring cash generated by the business that can be used to cover debt and lease costs. The “Steady State” section of the revised Framework presents a range between 1.5 and 2.5.

With respect to profitability, the Advisory Panel suggests that ratios be established in the following areas: an EBITDA margin and a return on equity (ROE) target. As noted earlier, earnings before interest, taxes, depreciation and amortization is a good indicator of profitability and is a widely used metric to assess the recurring cash generated. The “Steady State” section of the revised Framework presents a figure between 10% and 15%.  

With respect to dividend policy, the Advisory Panel suggests that lower payout ranges would be appropriate while Canada Post is undergoing an extensive modernization program, with the payout ranges rising as Canada Post exits the intensive investment cycle and enters a more normal, steady state condition. The Framework suggests a 50% to 60% payout range at steady state, after modernization (during which time the range could be between 0 and 20%). The dividend ratio and ROE provide good proxy indicators of what Canada Post would have to demonstrate to the market so that it would be able to attract equity investors. The Revised Framework presents a 12.5% to 17.5% ROE.  

As noted earlier, the ratios or metrics for each of these financial indicators should be presented in a dynamic framework, which would mark appropriate objectives in each of the investment, transition, and steady state phases.

The Panel strongly recommends the establishment of a productivity ratio, which is not strictly speaking a financial ratio. But it is important to track that there has been a payoff to the modernization plan. One possible productivity ratio would be (operating expenses plus depreciation) divided by revenue, which would provide a measure of total expenses incurred versus revenue. Another is an EBITDA margin – (revenue less operating expenses) divided by revenue, which is an estimate of pre-tax cash earnings versus revenue. This latter revenue focuses on the amount of cash expenses (predominantly labour) required to generate revenue.  

With respect to pricing, the Advisory Panel does not feel that a performance-based price cap on stamp prices – as in the 1998 Framework – is appropriate, given the character of Canada Post’s present inflexible cost structure. A new stamp pricing regime should be linked to some national index that reflects those components that drive Canada Post’s costs: labour and transportation. Price increases within that index should be within Canada Post’s control; increases beyond that index would require government approval. A pricing index should:

• Allow Canada Post some business flexibility;
• Allow it to more than recover its costs; and
• Reflect Canada Post’s cost structure, which is dominated by labour and transportation costs.  

The Panel has not formulated an index that is appropriate to the last point, but recommends that any index chosen should, at a minimum, be at full CPI.

Assessment and implications

The proposed revised Financial Framework is presented in Part III (Annex II) for illustrative purposes and is based on calculations provided by professional consultants. Will Canada Post achieve financial self-sustainability if it performs to the standards set in the Revised Financial Framework ? This can be tested with a steady state scenario that assumes:

• Lower postal volume growth in the moderate range: 0.9% lettermail decline, 3% parcel growth, 4% addressed and 3.5% unaddressed admail growth;
• Increased operations group expenses relative to the Corporate Plan;
• A pension solvency deficit due to lower-than-expected returns on the pension plan assets in 2008 and 2009; and
• A two-cent stamp increase in 2009 and none thereafter.
   

Under such a steady state scenario, Canada Post is unlikely to achieve financially self-sustaining levels, even with the successful execution of the modernization program. It should be noted that financial self-sustainability is highly sensitive to volume forecasts, which are difficult to predict. If lettermail volumes decline even slightly more than anticipated (-1.5%), and growth in other areas is weaker (parcels at steady state and admail at 1% and 2%), then the financial shortfall becomes quite considerable and potentially out of control.

In order for Canada Post to attain the target financial leverage ranges needed to obtain the necessary funding from the debt markets, incremental earnings will be required. On the cost side, this could be partially addressed by limiting the costs of PPOs, and/or by addressing benefits and pension issues, and/or by addressing its high proportion of fixed costs. On the revenue side, this would require further stamp increases in 2010 and beyond, as follows:  

• The proposed two-cent increase in 2009, followed by a three-cent increase in 2010, followed by 3% rises annually thereafter; or
• The proposed two-cent increase in 2009, followed by a five-cent increase in 2010, followed by one-cent annual increases thereafter.  

In short, pricing and operating flexibility will be required for Canada Post to complete the modernization program and maintain financial self-sufficiency.

IV – Rural post

In the Terms of Reference assigned to the Advisory Panel , the Minister presents a number of principles that direct us to consider the rural post as having special stature in our considerations:

• Canada Post must maintain a universal, effective and economically viable postal service; and
• Canada Post is to continue to act as an instrument of public policy through the provision of postal services to Canadians.  

The Advisory Panel believes that the future of postal services in rural Canada requires particular attention. This became clear in our consultations, discussions and deliberations, and in our review of recent postal developments in Canada. The Terms of Reference point the Advisory Panel to consider the delivery of effective postal services to all Canadians, including those in rural areas, small towns, or isolated communities.

That the Government of Canada sees postal services in rural Canada as an important public policy issue is evident through its actions and statements over the last decade, from the 15-year-old moratorium on post office closings in rural areas to the 2006 directive to Canada Post to restore and maintain rural mail delivery to rural roadside mailboxes, where safe to do so.

The continuation of a blunt policy instrument like the moratorium on rural post office closings and the issuing of an equally blunt rural mailbox directive are symbolic of the fact that this is an unsettled policy area. Canada Post and the government have not developed a 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.

The Advisory Panel would like to clarify one key point at the start. The maintenance of an effective postal service in rural Canada is part of the universal service obligation, and part of the ultimate objective and core business of Canada Post. In this way, rural postal delivery should not be conceptualized as a public policy objective, as defined earlier. At the same time, how the USO is realized in rural Canada should be as open to discussion as is any other dimension of the USO and the postal system.  

(i) The rural postal network

The setting for recent discussions of postal policy in Canada is the moratorium on postal closings in rural areas by the federal government in 1994. This moratorium followed an extended period of post office rationalization in both urban and rural Canada in the late 1980s and early 1990s. This rationalization was part and parcel of Canada Post’s efforts to contain its costs during this period, and included other changes in service delivery, such as the introduction of community mailboxes in suburban areas. It is interesting to note that no subsequent government has undone the rationalizations that took place in the late 1980s and early 1990s, in either urban or rural Canada.

With respect to urban post offices, the rationalization initiative involved the closure of corporate post offices and the opening of privately owned dealer outlets within private commercial operations. In rural Canada, this involved the closing of post offices in towns with a dwindling population and/or little or no postal business. By 1992, 30% of the rural network had been changed or was in the process of being changed. Some 1245 post offices had closed, while 1000 others were replaced by retail outlets and 250 by outdoor boxes.[ 3 ]  

This brief review of changes to service delivery in the late 1980s and early 1990s serves to demonstrate that Canada Post’s initiatives to contain costs were not limited to rural Canada. Corporate post office closings, the introduction of dealer outlets and the advent of the super mailboxes or community boxes were urban initiatives that were controversial and disruptive, but have since settled into normal postal convention. Urban residents continue to receive their mail, but in a mix of delivery modes – including picking up mail at community boxes. Similarly, many corporate post offices have closed and access to postal services is increasingly made through dealer outlets and shops. The goals of delivery and access have remained, but the instruments to attain them have changed.

The situation in rural Canada is similar, albeit of a qualitatively different sort because of the more limited range of alternative options available. Nonetheless, the issue is the same: how to operationalize the goals of the USO via instruments that are appropriate to evolving market and demographic conditions.

There is considerable anxiety in rural communities about any initiatives that appear to weaken or to eliminate rural postal services. This relates not only to post office closures, but also to the processes used in realizing these closures or rationalizations. The Advisory Panel understands how important these post offices in rural areas are to a community’s economic viability, identity and sense of social importance. However, many of the existing rural corporate post offices were established in conditions very different from the present and reflected different needs, lifestyles, economic factors, trading patterns, transportation routes and modes, and communications options.

The Advisory Panel heard from Canada Post that, given its commercial obligations and financial realities, the corporation would like to impart a degree of financial and economic rationality on its network in rural Canada, pointing to the following:  

• Some (perhaps many) rural post offices are uneconomical to operate, and produce a net loss or cost more to operate than a franchise arrangement;
• There are often a number of significantly under-utilized post offices in one area, where one outlet might service everyone economically;
• In some cases, when operators leave existing post offices, it is difficult to impossible to find replacement postmasters to operate the outlets;
• The current process for closing or replacing a rural post office is cumbersome, expensive and time consuming; and
• A number of the communities that appear on the moratorium list have become more urban than rural in character, and should be removed from the list.  

Canada Post would like to modify the moratorium to reflect demographic and market conditions. It proposes the introduction of a proximity based approach to the issue, as follows:

• 98% of Canadians will be within 15 kilometres of a postal outlet;
• 85% of urban Canadian households will be within 2.5 kilometres of a postal outlet; and
• 80% of rural households will be within 7.5 kilometres of a postal outlet.  

The Advisory Panel believes that a review of the rural post office moratorium is overdue, given that much has changed in many parts of rural Canada since the 1998 Framework was established. It is the Advisory Panel ’s view that a new and more explicit mechanism should be developed to replace the moratorium. It should have a clear set of rules and procedural guidelines that would both safeguard and respect the postal service needs of rural Canada, while allowing Canada Post a degree of flexibility to deal with emergent issues and still respect the service needs of rural Canadians.

The Panel believes that all parties – rural communities, rural postal outlet users, Canada Post, and the government – would benefit from the government replacing the current approach with a clear policy statement in the USO that delineates what the government expects Canada Post to continue to support, with respect to rural posts, over the long term. Ideally, this would be complemented by specific references in the Service Charter, which would serve to clarify expectations and responsibilities with respect to the number and location of rural postal outlets and the levels of access/service levels to be provided to rural Canadians. These specific obligations would be developed through a consultative process led by Canada Post, with its conclusions and approach clearly explained and approved by government and would subsequently become a public document posted on Canada Post’s website and would be directly reflected in Canada Post’s business and corporate plans.

The Advisory Panel suggests a two-fold approach to establish this new rural postal service obligation. First, Canada Post and the government need to agree on a new definition of what should be considered “rural” for postal purposes, and this definition should reflect current population patterns. The Panel recommends that the new definition be established initially as “communities with a population of 10 000 or less”. Second, a mechanism would be established to set postal services expectations for Canada Post in rural Canada. This mechanism would allow Canada Post some flexibility to deal with emergent issues as well as cases where lower-cost alternatives could be put into place with little or no negative impact to the communities being served.

The first step would be to redefine what constitutes a rural community, using the definition noted above. This would remove from the list certain communities that have grown and can no longer be considered rural. Some examples include Abbotsford, British Columbia; Lethbridge, Alberta; Timmins, Ontario; Boucherville, Quebec; and Moncton, New Brunswick.  

The second step – the creation of a mechanism to set rural postal service expectations – would involve the development and adoption of proximity criteria, similar to those proposed by Canada Post in its submission to the Advisory Panel. However, this would specifically consider 100% of Canadians currently served in rural Canada through postal outlets, rather then the 98% reflected in Canada Post’s proposal. This would be the starting point for creating a list of all rural communities currently served. The list would show both the maximum service radius currently in effect, as well as the population or number of addresses served. It is proposed that Canada Post develop the proximity criteria through a consultation process directly involving rural Canadians. As a starting point, the Panel suggests that the rural component of the Federation of Canadian Municipalities be considered as an initial consultation vehicle to aid in establishing the proximity criteria and to further develop and test the acceptability of the concept being proposed.

As communities in rural Canada continue to evolve and their demographics change, it is important that Canada Post have some degree of flexibility to deal with emergent issues such as:  

• The catastrophic loss of an existing facility;
• The need to address consistent and significant financial losses where alternate arrangements with adjacent communities to rationalize services would have no significant impact on service or access and would provide acceptable service levels to the communities directly affected;
• Major problems with finding replacement staff for rural locations; or
• Other emergent situations which Canada Post identifies and which the government and community, after consultations, deem to be appropriate.  

The Panel also believes that Canada Post should be allowed to consider the use of dealer outlets in any of the scenarios noted, provided that existing services levels are continued or enhanced.

To ensure that CPC respects its ongoing commitments to providing rural services, rural service should be specifically incorporated into the USO requirements and further specified in the Service Charter with the Board of Canada Post being held accountable by the Minister for compliance. In this scenario any postal rationalizations or closures that result would be publicly disclosed and subsequently reviewed as a standing agenda item at the Minister’s and the Board’s annual meeting. The Advisory Panel is of the view that the Ombudsman should be designated as the party to which the public or directly affected communities can voice concerns with the process and/or approach used by CPC. The Ombudsman would present his/her findings in a public manner to the Board chair along with his/her recommendations for corrective action if deemed appropriate.

To further protect rural postal services, the Service Charter should specify the minimum number of postal outlets in rural Canada that CPC must maintain. As a starting point, that number should be set at 20 fewer outlets than now exist in rural areas. This would give Canada Post some leeway to refine its existing community consultation model and allow the Board, the shareholder and rural communities in general time to develop a comfort level with the process as it unfolds. Annual adjustments to this number could subsequently be considered as part of the criteria put forward in conjunction with Canada Post’s corporate plan. The revised number would have to be specifically and independently approved by the Minister during the regular approval process.  

(ii) End-of-lane delivery in rural Canada

The previous section focused on rural Canadians’ access to a postal network – to postal outlets and shops, where they could purchase postal products, drop off or collect a parcel, and so on. There is a second dimension to discussion about postal services in rural Canada, and that is rural mail delivery. In 2006, in the context of an extensive health and safety review of rural mail delivery to the end-of-lane , the government issued a directive to Canada Post to restore and maintain rural mail delivery to rural roadside mailboxes while at the same time respecting all Canadian health and safety laws.

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 20^th century in southern Ontario. It has subsequently expanded to include approximately 800 000 individual addresses served by Canada Post, predominantly in Ontario, Quebec and the Maritimes, as well as some cases in the West.  

A number of rural mail delivery drivers filed health and safety concerns and complaints about the unsafe conditions associated with delivering to various end-of-lane addresses. After investigation, the Labour Program of Human Resources and Skills Development Canada issued a number of cease-and-desist orders to Canada Post, requiring it to stop delivery to certain end-of-lane mailboxes. These specifically related to situations where delivery vehicles were not able to fully pull off the road to deposit mail into the end-of-lane mailboxes, thereby causing a potential and serious safety hazard with respect to collisions between the delivery vehicles and passing traffic.

Canada Post initiated a traffic safety review in response to these concerns and legal orders, and stopped service to any mailboxes where unsafe conditions were confirmed. Mail service was continued by relocating the individual box or by changing the pickup point to a local post office or community mailbox.

There was also a health or ergonomic issue related to the repetitive nature of the actions required to reach across the passenger seat of the delivery vehicle to insert mail in the end-of-lane boxes. These situations were most frequently addressed by adding a helper to assist the carrier to make the delivery.

On closer scrutiny, it is clear that this issue reflects the evolution over several decades of demographic, transportation and communication trends in Canada. Many of the affected residences are on roads that were once quiet lanes. Now, these same residences sit on high-traffic streets and highways, where there is a serious potential for accidents and injury both to the people delivering the mail and to passing motorists. In this context, and after discussions with Canada Post and the Labour Program of Human Resources and Skills Development Canada, the Advisory Panel believes that the traffic safety reviews undertaken by Canada Post were not only necessary, but were long overdue in some circumstances, particularly given the changes over time in traffic speed and road usage.

The Advisory Panel also believes that in the longer term, it is sensible to reconsider this method of mail delivery. Many of the communities served by this method have changed with the times. Residents generally have motor vehicles and regularly shop and conduct routine business in nearby communities and commercial centres. With the spread of high-speed Internet services throughout Canada including in rural areas, mail volumes are expected to decline over time. Given what the Panel perceive to be legitimate safety concerns associated with this method of delivery, and given the different rhythms of daily life and the increasing availability of electronic communications capability in rural Canada, the Advisory Panel suggests that Canada Post give serious consideration to the longer-term appropriateness and viability of this mode of mail delivery. The Advisory Panel believes that a proactive community engagement process should be undertaken to review current services and consider whether acceptable alternatives could be implemented for the communities involved that would eliminate personal injury risks to Canada Post personnel and more appropriately reflect current lifestyles.

This discussion of end-of-lane delivery raises a general issue for Canada Post and its communities, and that is how to devise the most appropriate and cost-effective instruments for pursuing the USO obligation in different circumstances. Existing methods – like lot-line delivery and door-to-door delivery – are decidedly convenient for customers and are often seen as a right. Perhaps the time has come to decide whether these considerations outweigh the very real costs involved – costs which are not borne by taxpayers, but rather by all postal users, including the majority who do not receive what they would consider to be a ‘premium’ service. The Advisory Panel believes that it would be timely, in the context of Canada Post’s capacity to be self-sustaining over the long-term, for Canada Post to engage Canadians in a discussion of the trade-off between the costs of providing these services versus the value received.

As a first step in advancing this discussion, the Advisory Panel suggests that Canada Post specifically include in its annual report an overview on the delivery methods it uses, indicating the number of addresses served with each delivery method and the financial costs and environmental impact of each on a per-unit basis. At some point, it is anticipated that hard decisions will need to be made regarding the net value to Canadian postal users of continuing these premium delivery service modes. It is believed that an appropriately informed discussion would produce the most appropriate decisions for both Canadians and for Canada Post.

V – Governance

In the Terms of Reference assigned to the Advisory Panel , the Minister presents a number of principles that direct us to consider the governance of Canada Post as being critical to the strategic review:

• Canada Post will not be privatized and will remain a Crown corporation;
• Canada Post must maintain a universal, effective and economically viable postal service; and
• Canada Post is to continue to operate in a commercial environment and is expected to attain a reasonable rate of return on equity.  

Moreover, the Terms of Reference (IV. Scope, Part D – Financial and Performance Targets) direct the Advisory Panel to:

• Assess whether the parameters set out in the 1998 Multi-Year Policy and Financial Framework are still valid and provide appropriate accountability;
• Consider whether there is an appropriate policy and Financial Framework to ensure that Canada Post can compete successfully in the marketplace and meet its public policy obligations;
• Establish appropriate financial and performance targets for Canada Post that will reflect its dual public and commercial objectives, and support its efforts to improve the corporation's cost structure and efficiency and meet future infrastructure needs; and
• Consider how service delivery standards should be established.  

The governance regime for Canada Post as a federal Crown corporation is set out primarily in the Financial Administration Act (FAA) and in the Canada Post Corporation Act (CPC Act), and this regime is operationalized through the corporation’s relationships with the Minister responsible, the Minister’s portfolio department (Transport Canada), and with Treasury Board Secretariat, Department of Finance and the Privy Council Office.

The strategic review’s Terms of Reference reflect the importance that the Minister responsible for Canada Post assigned to the challenging questions of the governance and accountability of Canada Post, which is owned by the Government of Canada but operated by an arm’s-length Crown corporation. How does one ensure accountability and service standards and expectations – from financial to USO considerations – when one wants the post to perform with autonomy and to be commercially successful and viable?

In her 2005 Status Report on the Governance of Crown Corporations, the Auditor General noted that the “responsibilities and expectations of the government regarding Crown corporations still need to be clarified.” Government officials have indicated to the Advisory Panel that progress has been made since that time and certainly the Panel has neither seen nor heard anything to suggest that there is inadequate oversight of the corporation. Nevertheless, it is the Advisory Panel ’s view that the current governance model needs improvement.

As reported in Part I, the experience of many posts abroad demonstrates that appropriate governance or institutional arrangements can contribute substantially to the creation of a viable post and effective postal policy. The Advisory Panel believes that there is lack of clarity resulting in uncertainty in the Canadian system about how much corporate autonomy Canada Post should enjoy.  

This is not terribly surprising, given that the governance context for Canada Post is essentially unique. There are few, if any, other commercial Crown corporations of Canada Post’s scale, financial significance and complexity. This makes it very difficult to create general rules and approaches.

The uncertainty is also not surprising, given that Canada Post evolved from a government department in 1980 into an increasingly corporate and commercial entity functioning in an increasingly competitive market. At each stage, its need for corporate autonomy and authority has changed. At the same time, governments have had to adjust their accountability needs as corporate autonomy has increased. And as governments changed over this period, so did their political, ideological and policy orientations. Hence, there has been a fluid but not necessarily harmonious evolution of Canada Post’s quest for autonomy and the governments’ need for some degree of accountability and control. It is not surprising that the respective sense of authority, responsibility and duties has not always been in equilibrium.

It is the Advisory Panel ’s view that what is needed at this stage in Canada Post’s evolution is to update, clarify, make transparent and operationalize the respective roles, responsibilities and authority of the government (shareholder), the Board of Directors, and Canada Post’s management. This will create a policy and governance environment that will encourage effective and timely thinking to support decisions and action about the USO, the rural post, modernization and financial sustainability.  

(i) The historical evolution of governance relations

The relationship between the government’s authority as shareholder and Canada Post’s autonomy as a Crown corporation has been a dynamic, complex and changing one.

When Bill C-42 transformed the Post Office Department into Canada Post Corporation, it took postal operations out of the sphere of day-to-day government control and placed them in an arm’s length Crown corporation, financially independent of government. From the outset the governance relationship between the government and Canada Post was a mixture of autonomy and control. This mix has evolved over time, and has blurred somewhat the players’ sense of authority and responsibility in recent years.

Bill C-42 assigned Canada Post a degree of corporate autonomy:

• It created an 11-person independent board of directors, made up of nine directors, the CEO and a board chair responsible for devising corporate strategies and plans for government approval;
• The board was given authority to appoint a professional management team, and its employees were no longer part of the public service;
• Canada Post was allocated some degree of financial independence from government by being granted an exclusive privilege (or monopoly) for lettermail; and
• There would be no third-party independent regulation of Canada Post’s activities and there would be no postal department or secretariat to which Canada Post reported.  

This corporate autonomy was balanced or made accountable to the shareholder (the government) in many ways:

• A minister responsible for Canada Post was assigned;
• The board chair, the directors and the CEO were appointed by the government;
• The vice-presidents of the corporation were appointed by the board but approved by the government. (This has since been changed);
• The government would approve corporate plans and budgets;
• Parliament would receive Canada Post’s annual reports, which would be subject to parliamentary review in committee;
• The Governor in Council would hold ultimate authority for price and regulatory changes;
• Canada Post could not acquire shares or companies without government approval;
• Canada Post could not borrow, take on debt, or sell property without the approval of the Minister of Finance;
• The government would hold a directive power that it could use to compel Canada Post to take actions it would not otherwise perform; and
• The government had the authority to audit Canada Post’s books.  

Over and above this formal or direct authority, the goals of Bill C-42 set two operational objectives that Canada Post would have to fulfill and to which it was accountable, and which would shape its operations and practices:

• Canada Post’s operations had to be conducted on a self-sustaining basis; and
• Canada Post was to provide “a standard of service that will meet the needs of the people of Canada and that is similar with respect to communities of the same size.”  

So, while Bill C-42 created Canada Post as an autonomous corporate entity – and, indeed, instructed it to act as a commercial operation and be financially self-sustaining, Canada Post’s autonomy was counter-balanced by considerable government authority.

The subsequent relationship between government authority and corporate autonomy has been an uneasy one. In the early years of Canada Post – the early and mid-1980s – this partially reflected the fact that Canada Post’s objectives were fairly nebulous and many of the process relationships were obscure. With respect to the former, it was not quite clear precisely what self-sustaining meant, or how service standards were to be set and/or evaluated. With respect to the latter, governmental approval processes involved several bodies, including Treasury Board, Finance, PCO and whatever department the Minister was heading. And issues like price changes through the government’s regulatory process were always politically sensitive.

The government expressed its authority dramatically after this period, when it rejected Canada Post’s 1985 corporate plan and replaced Canada Post’s CEO. The government then ‘clarified’ its sense of many of the abstract or general features of Bill C-42 by creating the corporation’s 1986 corporate plan. This plan, and subsequent initiatives, gave more concrete form to Canada Post’s objectives:

• The government instructed Canada Post to balance its budget by 1987-88, to create a surplus by 1989, and to generate $300 million in dividends and a 14-15% return on equity by 1994;
• This instruction was extended when CPC was scheduled under the Financial Administration Act (FAA) as a Schedule III (Part II) Crown operation functioning in a competitive market environment; and
• Delivery standards were also set (two days locally, three days regionally, four days nationally).   

This was a transformative moment in Canada Post’s evolution, for it henceforth functioned in an environment where its shareholder’s expectations were made reasonably clear, both in financial and in service terms.

Just as important, though, was the fact that once the government made its policy objectives clear, Canada Post was given the corporate autonomy to realize the financial and service objectives set by the government. From the mid-1980s through the early 1990s, Canada Post introduced a set of initiatives designed to attain the government’s objectives. This autonomy was used, among other things, to extend the use of community mailboxes (thereby limiting home delivery); to contract out sorting and delivery of parcels; to close or transform 30% of the rural network; to franchise urban post offices; to increase postal mechanization and reduce full-time employment by 10 000 employees; to move to market-based pricing of its competitive products; to limit financial support to public postal services like publications mail; and to purchase Purolator to enter the courier market.

There was considerable public and political reaction to these measures. The Minister responsible for Canada Post deflected these reactions and defended Canada Post’s autonomy, maintaining that these measures were appropriately designed and directed to meet the government’s expectations.

There was considerable public and political reaction to these measures. The Minister responsible for Canada Post deflected these reactions and defended Canada Post’s autonomy, maintaining that these measures were appropriately designed and directed to meet the government’s expectations.

In the Panel’s opinion, the developments in this period were not accompanied by complementary governance developments within government. Transparency and focus did not improve, and governance remained over-reliant on the authority of the Minister responsible for Canada Post. The government of the day flirted with, but did not pursue, the idea of third-party regulation.

The political landscape shifted in 1993 and the government subsequently communicated objectives to Canada Post in response to what had come to be considered to be the corporation’s over-emphasis on achieving financial objectives to the detriment of its social obligations. The government acted to reintroduce a balance between the financial and social goals of Canada Post. For example:  

• A moratorium on rural post office closures and conversions was introduced and continues today;
• The government disallowed a price increase. An increase was later approved, but a price freeze was then imposed until 2000;
• It created a mandate review (the Radwanski Review) as a way of re-examining and re-establishing a balance between Canada Post’s social and financial goals; and
• The government increased Canada Post’s service standards and required their independent scrutiny.  

At the same time, the government confirmed that Canada Post could remain active in competitive and commercial areas beyond the narrow confines of lettermail, and that it could retain ownership of Purolator. Moreover, the government did not require Canada Post to undo the corporatization accomplishments of earlier years, such as post office closings, franchising and rationalization, and it continued to cut postal subsidies (e.g. to publishers). It further corporatized the Canada Post environment by making it a prescribed Crown corporation under the Income Tax Act, which required it to pay income taxes like any private sector company.

In 1998, the government created the Multi-Year Policy and Financial Framework – an initiative matching the significance of Bill C-42 and the 1996 corporate plan in the evolution of Canada Post’s relationship with its shareholder.

The Framework articulated the government’s financial expectations, basic lettermail rate price cap and some service expectations, in a series of quantitative targets. At the same time, it also confirmed Canada Post’s autonomy in the wider competitive environment. Generally, the idea was that, once the framework was in place, Canada Post would have the autonomy to pursue its commercial agenda within the parameters of the framework. Moreover, the fact that the framework was announced quietly and without public fanfare gave CPC some degree of protection and increased its autonomy.

The Framework was somewhat clearer on what the government’s expectations were, but these remained somewhat general and in some ways evasive. For example, the framework was imposed on top of some other government objectives, like the moratorium on rural postal closings, which created a complex web of government expectations. Once again, these developments were not matched by complementary governance developments within government.

In recent years, the government has articulated and concretized some postal expectations, albeit often in a reactive manner under the pressure of circumstances. Recently, it has used its directive power to set out and clarify to Canada Post its policy objectives in two areas. First, in response to Canada Post’s actions to address the health and safety concerns of some rural mail carriers, the government directed Canada Post to restore and maintain rural mail delivery to rural roadside boxes that were serviced on September 1, 2005 and to draw up an operational plan to address this issue. Second, the government directed Canada Post to continue to provide financial support to the Publications Assistance Program until March 31, 2009. More recently, the government introduced Bill C-14, which proposed to remove outbound international mail from Canada Post’s exclusive privilege, thereby opening that sector of the postal market to private sector competition. The Bill died on the Order Paper when Parliament was dissolved in September 2008.  

To sum up, Canada Post’s corporate autonomy has been extended somewhat over its quarter-century experience. How has this been accomplished?

• Appointments to the Board of Directors and of senior management have been based increasingly on corporate and commercial expertise and experience;
• Governments have set increasingly clear and concrete financial objectives and targets that authorized Canada Post’s increasingly commercial and corporate activity and performance;
• The government has made it specific that Canada Post can perform commercially in competitive markets;
• The government has set service standards within which Canada Post can make viable business and operational determinations; and
• Canada Post has been allowed to exercise a certain degree of pricing autonomy in competitive markets.  

At the same time, the government has exercised its authority as shareholder and maintained a strong accountability relationship with Canada Post:

• It has retained and exercised its appointment powers, including for the Board of Directors, the Chair and the CEO;
• It has set increasingly concrete financial and service targets, and has issued directives ordering Canada Post to undertake actions it would not have done on its own; and
• It has retained its authority to approve Canada Post’s corporate plans and budgets, and to exercise its authority over reserve area prices, acquisitions, mergers and audits.  

(ii) Implications

What has been the cumulative impact of these developments on the postal governance environment in Canada?

First, the institutional or decision-making web for postal matters is dense and somewhat obscure. There are several government and corporate players. On the corporate side, there are the Board Chair, the directors, the Board committees and the CEO. On the shareholder side, there is the responsible minister, Treasury Board ministers, the Minister of Finance, the Privy Council Office and their collective supporting bureaucracies, the Governor in Council and Parliament. Each of these players has different authority, responsibilities and roles to play in the Canadian postal regime, which also is subject to the Financial Administration Act, the Canada Post Corporation Act, various regulations and other legislation, as well as the Multi-Year Policy and Financial Framework. The major players and instruments in this institutional web are illustrated below.  

A key point in Canada Post’s submission to the strategic review relates to its arrangements with its shareholder (the government), which it feels inhibits the effective use of the authority and expertise of the Board, thereby making CPC less 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 result that approvals of corporate plans, certain commercial transactions and borrowing can take a long time, and market opportunities can be lost while lengthy oversight processes unfold. The processes generate a risk-averse environment, thereby inhibiting the corporate and commercial development of CPC.

On the other hand, 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. Indeed, ministers are ultimately accountable to Parliament for the overall effectiveness of the Crown corporations in their portfolios and are answerable in Parliament for the corporations’ activities. The minister’s portfolio department, along with the Treasury Board Secretariat, the Department of Finance and the Privy Council Office exercise a challenge function with regard to Crown corporations’ corporate plans and other activities requiring government approvals. Canada Post may be an arm’s length Crown corporation, but the realities are that the corporation exists as an instrument of public policy and its financial activities and performance have a direct impact on the Government of Canada’s bottom line. For these reasons, government officials have legitimate causes for concerning themselves with Canada Post’s activities.

After considering both points of view, and more particularly the way they have played out over the last number of years, the Advisory Panel has concluded that 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.

At the risk of oversimplification, there is some misunderstanding or lack of appreciation by the corporation of the extent to which the postal operation functions in an environment bound by public policy objectives and expectations, all of which remain within the authority of the shareholder, notwithstanding the corporation’s commercial and financial expectations. Similarly, there is some misunderstanding or lack of appreciation by the shareholder and its various agents of the extent to which the shareholder is articulating public policy expectations in an environment bound by commercial and corporate imperatives. These imperatives are part of the corporation’s daily reality.

This state of affairs is likely the result of the intensity of the simultaneous development of Canada Post’s corporate autonomy, style and culture and the shareholder’s efforts to maintain a rigorous articulation of public postal objectives within this increasingly commercial and competitive environment. The Advisory Panel believes that the corporate and shareholder processes may simply not be connecting.

This is a critical state of affairs for the future of Canada Post and postal services in Canada. Without a mutual understanding and clarification of expectations and objectives, it will not be possible to, on the one hand, specify and clarify the USO expectations that lie at the centre of the postal environment, which means that on the other hand there will be no clear understanding of what is the appropriate network in which to pursue the USO, nor how to go about financing the USO in a stable and self-sustaining way over the long term.  

(iii) Lessons from abroad

The Advisory Panel noted earlier that effective national posts operate in governance arrangements that simultaneously encourage modern business practices and attention to public purposes. These governance arrangements assign clear and transparent responsibilities and authority to each of management, boards and shareholders, to make the operation of the posts accountable and effective. These arrangements try to ensure 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.

A common feature of these arrangements is that they all provide for clear, transparent and separate lines of accountability for financial (ownership/shareholder) and social (regulatory) issues. This is at the heart of the governance issue: how to set out a clear, transparent and accountable 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.

Where posts are 100% government-owned, there is only one shareholder. Even in the context of a government-designed and determined corporate autonomy, the shareholder’s interest is established, articulated, communicated to the post, and it is exercised. This is communicated regularly through the board of directors, named exclusively or primarily by the shareholder, as well as to management. The board is directed to act according to sound commercial principles, and to maintain and enhance shareholder value and financial results. It recruits and oversees the executive management team, which prepares budgets and plans for board review and approval. The board interacts and communicates with a shareholding ministry in the government, according to agreed-upon expectations. The nature of the relationship between the board and the shareholding ministry is made clear and predictable, oversight is “light” to the extent that the government has confidence in the board, and ideally interaction between the shareholder and the board is open and regular. This pattern of open and direct communication is also exercised between the shareholding ministries and postal management.

The government has social or public policy interests to ensure that the post maintains the USO, carries out its obligations, and functions at a satisfactory quality and service level, and attains whatever social goals the government may assign to the post. To an extent, these social goals may stand in some antagonism to the financial goals.

The way many countries manage the sometimes conflicting social and financial objectives of the post is to have the post’s social or regulatory goals safeguarded by a department other than the one with responsibility for overseeing financial matters. Indeed, it has become a principle of the modern postal experience that ownership (i.e. shareholder or financial) functions should be kept separate from the regulatory or social ones. Under this model, the government’s regulatory or social expectations are made clear and quantified, overseen and managed by a regulatory body or department that interacts with the post in setting, reconsidering, and implementing these social (public good) targets and expectations in an open and predictable way. A separate department with the appropriate expertise and mandate has responsibility for the financial oversight of the post and, again, the principles of openness and predictability are applied to the establishment, monitoring and amending of financial expectations. The Advisory Panel believes that it is time to consider introducing such a postal governance model to Canada in the longer term.  

(iv) Governance issues requiring attention

The Advisory Panel notes that Canada Post’s Board has established a nominating committee and maintains a skills profile for the Board. The Advisory Panel suggests that the Board’s experience matrix should be regularly reviewed, to ensure that its membership includes the appropriate mix to provide the necessary capacity to undertake due diligence in all areas, including modernization, financial self-sustainability and USO obligations and other public policy obligations. With respect to the latter, the Advisory Board feels that a more direct representative of the shareholder on the corporation’s Board of Directors would be appropriate – a current or former deputy minister or associate deputy minister – to provide public policy sensitivity to the Board mix.

The Panel also suggests that the current practice of having the CEO as a voting board member of the Board of Directors should be reconsidered, given the evolution of Canada Post and presuming the government’s desire to strengthen the roles and responsibilities of the Board. Not having the CEO as a member of the board, which is a fairly common practice in the private sector, would potentially serve to increase board ownership of decisions and provide a higher degree of demonstrable accountability to the shareholder. It would also permit a more focused discussion between the Board and the Minister regarding issues such as the appointment, performance review and remuneration of the CEO, all of which have been raised as a serious concern by Board members both past and current.

It is the Advisory Panel ’s view that the current Board of Directors of Canada Post is performing its duties in a competent and reasonable manner as the Board of a ‘commercial operation’, the task assigned to it under the Canada Post Corporation Act. At the same time, the Advisory Panel believes that the corporation’s decisions are often not seen as compatible with the public policy objectives and sensitivities of the government and that any resulting misunderstanding is a function of the absence of a common understanding of the government’s expectations and requirements of Canada Post in these areas. As the Panel has suggested elsewhere, the creation of a Service Charter would help in creating clarity for everyone.

The Advisory Panel believes that there must be a clear understanding between the Government of Canada and the Canada Post Board regarding the roles, responsibilities and accountabilities of each party related to the USO, the modernization plan, expectations about the rural post, and the basis for developing financial self-sustainability, from development and approval to financing, execution and communication. There must be a clear connection and understanding of the respective responsibilities and accountabilities of the corporation and the government.

In addition to clarifying roles and expectations, it is equally important to clarify what is intended to be ‘controlled’ by the government through the processes it employs to approve Canada Post’s corporate plans and restricted transactions. Moreover, an understanding must be reached as to the amount and timing of the interactions required between the parties and their respective officials during the construction of the corporate plan and capital expenditure plans. Within this approach, there should be a clear and direct relationship between the government and Canada Post management, including a clear articulation of expectations, regular meetings between the Board and the minister, and effective interactions at the working level.

The Advisory Panel recommends that the government build upon the postal oversight expertise already in place at Transport Canada to establish an inter-departmental postal oversight team, or working group, chaired by Transport Canada and made up of senior officials from Transport Canada and central agencies. The purpose of the working group would be to develop governmental consensus on postal matters and to communicate and articulate the government’s point of view on these matters. It would be important for the government to ensure the maintenance of sufficient capacity and a degree of postal experience and intelligence on this working group so that interactions with Canada Post unfold in a nimble and informed way.

In the longer term, the Advisory Panel believes that responsibility for financial (shareholder) and social (regulatory) functions and responsibilities should be separate, with different accountability processes and oversight departments. In this regard, the Advisory Panel suggests that the government give consideration to the Australian and New Zealand postal governance models, whereby financial responsibilities and authority are assigned to one department (e.g. Finance), while regulatory or social authority and responsibility are assigned to another (e.g. Transport).  

(v) A proposal for future consideration

The Financial Administration Act and the Canada Post Corporation Act ascribe specific roles and responsibilities to specific government players (e.g. the “appropriate minister,” the Minister of Finance, the Treasury Board and the Governor in Council). The Panel is not suggesting a complete overhaul of this framework; rather it proposes a refinement of the governance model.

The ingredients of this future governance regime would build upon the good governance practices already discussed above and embody the following principles:  

• The roles, responsibilities, and authority of each of Canada Post’s management, the Board of Directors, and oversight departments should be specific, clear and transparent;
• Primary due diligence, financial/commercial responsibility, and recruitment of the CEO and senior management should rest with an autonomous board, separate and distant from government, and this board should be made up of individuals with extensive and intensive commercial expertise and experience;
• The government should exert a practical degree of oversight through clear policy statements about what it wants and expects and through the appointment of the board chair and members, including a shareholder representative of some sort (direct or indirect), and the maintenance of a clear and direct relationship between the government and the corporation;
• To the extent that the government has confidence in the board of directors, responsibility for oversight of the corporation’s business should be left entirely to the board. The board itself should be held accountable to the government for performing this oversight in a diligent manner. Where a specific need for the continued government oversight and control continues to exist, this should be explicitly noted and mutually understood with regard to underlying intent as well as to the requirements expected of the corporation to obtain any approvals so required;
• There should be regular meetings between the board and the minister responsible to facilitate the clear articulation of expectations and the reporting on success against those expectations, as well as government review and approval of annual corporate plans and financial targets; and
• Quality, service and USO expectations should be clearly and publicly stated in quantifiable terms, within a charter or contract type of arrangement, to be developed in consultation with the corporation and overseen by a government department or agency separate from the shareholding ministry.  

The Advisory Panel suggests, at least for illustrative purposes, that the regulatory minister for Canada Post be the Minister of Transport and the shareholder minister be the Minister of Finance. As the regulatory minister, the Transport Minister, who is currently the “minister responsible for Canada Post”, would be responsible for the oversight of the universal service obligation, the Service Charter, and regulated lettermail prices. Under the Financial Administration Act the Minister of Finance is already implicated in the financial oversight of Canada Post. As the shareholder minister in the new model, this oversight role would be strengthened and made more transparent. An inter-departmental postal oversight team such as that described earlier would play an integral role in coordinating the government’s interactions with Canada Post.

Appendix H provides further discussion of the practical aspects of such a governance model.
Figure 5 illustrates the proposed postal oversight responsibilities for this “dual department” governance model.  

Figure 5: Future “Dual Department” Postal Oversight Proposal

The Panel recognizes that changes to established governance practices such as those outlined above could not be expected to be implemented overnight. A multi-year transitional period is envisioned. That said, in the Advisory Panel ’s view, this model, if implemented in an environment where the government’s expectations of Canada Post have been clearly specified, will prove to the be most effective and efficient way for the government to ensure that Canadians continue to be well served by Canada Post in the future.

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Part II  Footnotes

[1] Robert M. Campbell, The Politics of the Post: Canada's Postal System from Public Service to Privatization, (Peterborough, Ont.: Broadview Press, 1994), p.380

[2] See CUPW’s submission to the Panel.

[3] Campbell, The Politics of the Post, p. 281

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