In establishing the Strategic Review, the Minister responsible for Canada Post instructed the Advisory Panel to “examine Canada Post’s public policy objectives, its ability to remain financially self-sustaining, and the continued relevancy of the 1998 Multi-Year Policy and Financial Framework.”

The Strategic Review was guided by four principles enumerated by the Minister:

• Canada Post will not be privatized and will remain a Crown corporation;
• Canada Post must maintain a universal, effective and economically viable postal service;
• Canada Post is to continue to act as an instrument of public policy through the provision of postal services to Canadians; and
• Canada Post is to continue to operate in a commercial environment and is expected to attain a reasonable rate of return on equity.

The Minister instructed the Advisory Panel to focus on a number of areas, including:

• The state of the postal market and postal competition;
• Public policy objectives and responsibilities;
• Commercial activities; and
• Financial and performance targets.

In Part I of this report, the Advisory Panel reviewed and analysed the modern postal world, including the latest developments in the postal market in Canada and around the world; what Canadians think about postal matters; postal developments in a number of countries; and Canada Post’s analysis of the postal world and its views of what it requires to be successful and effective in that world.

Based on its findings in Part I, the Advisory Panel presented and explored in Part II the five critical issues needing further analysis. The subsequent analysis in Part II forms the basis for the Advisory Panel’s recommendations, which are presented in this part of the report. These recommendations are clustered around the five issue areas explored in Part II.  

I – Universal service obligation

The universal service obligation lies at the heart of the postal endeavour, as the raison d’être for Canada Post’s existence as a Crown corporation and as the object of public postal policy. Given that Canada Post exists in an increasingly corporate and commercial environment, the USO must be better defined and communicated more concretely by the government to both Canadians and to Canada Post, in order that everyone understands what the USO represents. The USO principles should be translated into operational terms in a Service Charter – a contract between Canada Post and the Government of Canada.

Defining the parameters of the USO

1. The government should articulate and communicate to Canada Post its expectations of the USO, to establish a USO that is universal, affordable, timely, accessible and of high quality with respect to both letters and parcels. This should be communicated in the following areas:
• Universal scope of the USO: delivery to all Canadians, businesses and organizations, five days a week;
• The content of the USO: letters, parcels, and publications (including newspapers and magazines);
• Delivery standards: a guaranteed percentage on-time delivery by area;
• Delivery: five day-a-week delivery service, via instruments of delivery appropriate to community circumstances, with any exceptions to be strictly defined;
• Accessibility to the postal network: guarantee of access to postal outlets and post office boxes by some sort of proximity formula and minimum number of access points;
• Affordability: uniform prices for single piece lettermail products in the exclusive privilege area up to an agreed-upon weight;
• Free mail service for materials for the use of the blind; and
• A clear confirmation that postal service in rural Canada is by definition an integral part of the USO.  

The USO in action – a Service Charter

2. The government’s expectations of the USO should be issued and communicated in a Service Charter, which would be made public and would be part of a new financial and service framework for Canada Post. The Service Charter would be part of a contract between the government and Canada Post. The proposed Service Charter, contained in Annex 1 to this section, will address several components critical to the long-term success of Canada Post:
   • Statement of underlying principles
   • Universal service obligation
   • The reserve area
   • Delivery standards
   • Retail network
   • Rural postal network
   • Delivery modes
   • Pricing – regulated and non-regulated
   • Compliance assurance
   • Reviews and amendments  

Implementation of the Service Charter

3. The Board of Directors of Canada Post should be held accountable for the monitoring of the Service Charter, which would be implemented by the management of Canada Post. The Board should report annually to the public and to the government on Canada Post’s performance against the Service Charter. This should be done in various formats – on Canada Post’s website, in the corporation’s annual report, in regular communications with the Minister, and in quarterly reports to the Minister when appropriate.

4. The Minister’s portfolio department (currently Transport Canada) should adopt appropriate instruments to further develop its expertise in the areas necessary to appropriately evaluate Canada Post’s compliance with these objectives.
5. The Service Charter should be reviewed and updated regularly, at a minimum every five years.

Financing the USO

6. The Advisory Panel recommends that Canada Post’s core responsibility to pursue its USO obligations continue to be primarily financed by its exclusive privilege over lettermail.
7. The Advisory Panel recommends that the USO and the Service Charter should inform financial calculations and discussions between the government and the corporation and effectively be the foundation for the development of Canada Post’s business and corporate plans. Engagement between the Board and the government should take place throughout the corporate plan development process to ensure common understandings exist. It is critically important that the government understand both the service and the financial implications of the Service Charter and the way in which the USO and Service Charter underpin the financial plans of Canada Post.
8. The Panel recommends that the costs of the USO be calculated and identified in the corporate plan and in the annual report.

Deregulation

9. The Advisory Panel recommends neither a general deregulation of the postal market nor a reduction in the existing level of Canada Post’s exclusive privilege, save for one segment as noted in # 10 below.
10. The Advisory Panel recommends that outbound international mail be open to competition, as has been the practice (if not the law), as a single incremental step towards the liberalization of postal markets that is unfolding internationally.
 

Public policy objectives

11. The Advisory Panel recommends that 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.

Public policy objectives considered by the panel include:

The Library Book Rate
• Government Free Mail
• The Food Mail Program
• The Publications Assistance Program

The character of each of these public policy objectives varies considerably and each therefore requires individual attention.

12. With respect to the Library Book Rate, the Advisory Panel was unable to determine which federal government department had clear program responsibility for this activity. This perhaps explains why it has been an obligation historically passed on to Canada Post. In keeping with the principle noted above, the Panel does not believe this should be an obligation that is subsidized by Canada Post on an ongoing basis. Given that the majority of the transactions are intra-provincial, it appears that this is largely a provincial responsibility that may or may not require federal government support on an ongoing basis. In any event, this is clearly a decision that should be made by the federal government.
13. The Advisory Panel recommends that Canada Post deal with the Library Book Rate Program on a “single large-volume customer basis” to ensure that the libraries receive appropriate volume and other commercial discounts as would be available to large-volume commercial customers.
14. With respect to Government Free Mail, the principle of user-pay appears to have been fully applied in that there is a recognition by the government that Canada Post should receive compensation for this category of mail. There is, however, a commercial transaction aspect that needs to be addressed between the parties (i.e. Canada Post and Parliament) to ensure that Canada Post is not subsidizing this program indirectly through the pricing model currently in place.
15. The Food Mail Program also appears to be operating on the user-pay principle, with the only point of contention being the mark-up rate allowed to be charged by Canada Post. The Panel believes this is an issue of a commercial nature, to be resolved between the parties. It further believes that Indian and Northern Affairs Canada should consider the option of putting these services out to public tender on a fee-for-service basis.
16. With respect to the Publications Assistance Program (PAP), the Advisory Panel understands that the current obligation placed upon Canada Post to contribute to the PAP subsidy for publications mailings expires in March 2009 (Canada Post’s PAP contribution is equal to approximately seven cents per copy mailed). The Panel believes that Canada Post’s PAP obligation should be allowed to expire.
17. The Panel also recommends that distance-based pricing for publications mail be reviewed to ensure that rural Canada is not unduly affected by the consequences of this type of pricing structure for publications mail.

II – Modernization of Canada Post

Canada Post must have a sufficient and modern postal network, with up-to-date technology and competitive processes and products, if it is to fulfill its USO in a competitive market and in a financially self-sustaining way. The Advisory Panel firmly believes that ensuring that Canada Post continues to have the capacity to fulfill its USO is a serious matter, one that must be attended to on a priority basis. In this regard, the Advisory Panel notes that the government accepted the general principle that Canada Post must substantially modernize its network when it accepted the corporation’s 2008-2012 Corporate Plan.

18. In the interest of improving clarity and communication between Canada Post and the Government of Canada, the Advisory Panel recommends that the government require Canada Post’s Board of Directors to fully develop and present its multi-year modernization plan to the government as a complementary component of the corporation’s 2010-2014 corporate plan submission. The fully developed plan and presentation should include:

• A statement clearly describing the specific activities to be undertaken over the term of the plan, and the annual capital requirements necessary to carry out the modernization plan;
• Identification and quantification of financial sources (internal and external) and needs;
• An analysis of productivity payoffs and expected labour savings; and
• A schedule or timetable demonstrating the break-even date, net gains from modernization, the potential for the introduction of new products and services, and other results.

19. The Advisory Panel further recommends that an update of Canada Post’s modernization plan be included in the corporation’s corporate plan each year for the duration of its implementation.
20. The Advisory Panel suggests that the Board of Directors consider establishing a modernization committee for this capital intensive and productivity improvement oriented initiative, composed of Board members with sufficient expertise and experience to ensure appropriate due diligence and risk-management oversight.

Financing and access to capital

21. The Advisory Panel recommends that the modernization plan be considered within the larger context of the new revised Financial Framework and Service Charter and Canada Post’s broader Corporate Plan, such that Canada Post would have adequate capacity to finance the modernization plan.
22. The Advisory Panel recommends that the Board of Directors have access to levels of capital borrowing appropriate to the financial plan developed to support the modernization plan and to Canada Post’s capacity to generate funding and results. The Advisory Panel considers this capital borrowing level to be $1.7 billion.

Labour and productivity

A successful modernization plan must eliminate obsolescence and increase productivity, to allow Canada Post to realize its USO commitments in a financially viable manner. This is expected to result in adjustments to the staff complement. Canada Post notes on page 22 of its submission that a significant number of employees will retire from or leave the corporation over the next decade.

23. The Advisory Panel recommends that the government support Canada Post’s pursuit of the modernization plan, with respect to the opportunities provided by retirements and other attrition over the period of the modernization plan and beyond.
24. The Advisory Panel recommends that an independent third party work with Canada Post and its unions to review the existing collective agreements, in order to identify whether any parts will inhibit the modernization plan or impede the realization of productivity improvements necessary to ensure Canada Post’s financial self-sustainability, or otherwise significantly compromise Canada Post’s long-term viability.
25. The Advisory Panel recommends that the government permit Canada Post to introduce an employee share ownership plan as part of this process, in order to heighten employees’ involvement in and ownership of the process.
26. The Advisory Panel recommends that Canada Post be encouraged to continue to intensify its efforts toward productivity improvement. The Panel supports Canada Post’s further development of performance and cost-based metrics to facilitate the identification and tracking of key productivity indicators relevant to Canada Post’s business improvement practices. It further recommends that key performance indicators be incorporated into Canada Post’s financial performance framework and annual reporting process, in order to better show what results are being achieved and to explain trends.  

Environmental obligations

27. The Advisory Panel recommends that the planning, approval and implementation of Canada Post’s modernization plan be informed by the expectation that it will reduce Canada Post’s environmental footprint. This approach should inform existing initiatives, and be formulated as part of the modernization plan. Benchmarks should be set against which the Board should report progress through its annual report.

III – Financial self-sustainability

The Canada Post Corporation Act and the 1998 Policy and Financial Framework instruct Canada Post to pursue its USO in a financially self-sustaining way. Along with the modernization plan, the government and Canada Post must have a mutual understanding of what this requires by way of financial plans and needs.

Financial Framework

28. The 1998 Policy and Financial Framework should be reformulated, in light of the clarification of USO requirements in the Service Charter, the long-term investments in the modernization plan, and other considerations within this report.
29. The Advisory Panel recommends that the Board of Directors draw up a long-term plan for financial sustainability, for discussion with and approval of the shareholding department of government. This plan should address the costs of the Service Charter and the modernization plan investments, as well as the sources of financing that are available from the exclusive privilege and competitive markets. A proposed Revised Financial Framework (Annex II) has been developed to help meet these requirements and stimulate discussion.

Sources of financing

30. Over and above the revenues that Canada Post receives from its exclusive privilege and its commercial products, the Advisory Panel recommends that the Board of Directors work with the government on agreements in the following areas:

1. Access to increased capital and borrowing - $1.7 billion - facilitated under appropriate plans and criteria;
2. The two-thirds of CPI price-cap formula for basic lettermail has resulted in basic lettermail prices that are low relative to other countries examined by the Advisory Panel and low compared to Canada Post’s costs. The Advisory Panel recommends that the two-third of CPI price-cap formula for basic lettermail be replaced by a new formula that better reflects the factors that influence Canada Post’s expenses, such as labour and transportation costs. At minimum, the price-cap formula should be no less than the full CPI;
3. The development of a multi-year pricing plan, based on Canada Post’s five-year corporate plan, for regulated products within the exclusive privilege, to create more realistic prices, more certain revenue projections, and increased predictability for postal users (see Governance below for price-setting mechanisms);
4. Subject to approval by Governor in Council, a significant one-time stamp price increase for lettermail may be required to ensure ongoing self-sustainability;
5. A pay-as-you-go approach to public policy objectives that will commercially compensate Canada Post for its costs in these areas, to ensure that unintended subsidies of government programs no longer continue; and
6. A relaxation of the corporation’s dividend payment obligations for periods of intensive capital investment during the modernization plan.
 

Pension obligations

Canada Post’s pension obligations constitute a very serious threat to the success of its modernization plan. These obligations can deflect considerable financial resources away from modernization. Particular problems include pension solvency payment obligations, pension contributions needs and requirements related to post-retirement benefits. This threat is of particular concern in the current economic climate.

31. The Advisory Panel recommends that the government work with Canada Post to ensure there is a clear understanding among the parties of the urgent nature of Canada Post’s pension solvency requirements and their impacts, to ensure that an appropriate course of action can be set to avoid impeding the modernization program and its expected productivity improvements.
32. The Advisory Panel further recommends that subsequent corporate plans continue to fully capture these concerns and that they be addressed within the business plan/pricing models once a course of action is agreed upon between Canada Post and the Government of Canada, on how revenue requirements should be met.

Competitive commercial activities

33. The Advisory Panel, knowing that financing the USO is costly, believes Canada Post should look to leverage its networks to develop complementary activities and potential revenue streams, to the extent that these activities are related to its core business. The corporation’s annual cost study can continue to be used to verify that there is no cross-subsidization from the exclusive privilege revenue to the commercial operations.
34. The Advisory Panel recommends that Canada Post be allowed to continue to function commercially in those competitive markets where it is now active.
35. The Advisory Panel also recommends that the government clarify and communicate its expectations in this regard, specifying those situations where Canada Post can and cannot make acquisitions, enter new markets and get involved in international activities.
36. In situations where the government has communicated that it is appropriate for Canada Post to act, and to enable the Board to respond quickly to business opportunities, the government should give the Board the authority to spend up to $100 million in any single transaction without further approval.  

Partnerships

The Advisory Panel notes the extent to which partnership arrangements and joint ventures are emerging in posts abroad. This approach has the merits of bringing into the post new capital, practices, ideas, culture and personnel.

37. As a principle, the Advisory Panel recommends that the Government of Canada encourage Canada Post’s initiatives in creating partnerships. These could range from joint ventures to formal partnerships with other companies. These could also include access to the network (sorting, distribution, sales) and pooling or sharing transportation resources and capacity with other firms and/or competitors.

IV – The Post in Rural Canada

The Advisory Panel notes the intensity of interest in postal issues in rural Canada. The Advisory Panel believes that the government needs to clarify its expectations in this area to Canada Post and should subsequently communicate them to all Canadians.

Rural post and the USO

38. In order to eliminate confusion and anxiety, it is recommended that the government explicitly declare that the rural post is part of Canada Post’s USO, and not a public policy objective outside the USO.

Definition of rural

39. The Advisory Panel notes that the definition of rural applied by Canada Post in relation to its rural post office and delivery networks is outdated. The Advisory Panel recommends that a more realistic definition of rural be established initially as “communities with a population of 10 000 or less”.

Rural moratorium

40. 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 adopted. The Panel recommends that the definition of rural described above be applied to the current rural moratorium list to remove those communities from the list that are clearly urban in nature. Specific examples of those identified include: Abbotsford, British Columbia; Lethbridge, Alberta; Timmins, Ontario; Boucherville, Quebec; and Moncton, New Brunswick. This will allow future discussion and actions to be focused exclusively on truly rural communities and allow Canada Post to provide services in these urban centres as they would in any community of equivalent size and character in the rest of Canada, as is prescribed in the Canada Post Corporation Act.
41. The Advisory Panel recommends that a new and more explicit mechanism be developed to replace the moratorium with a clear set of rules and procedural guidelines that would both safeguard and respect the postal service needs of rural Canada, but also allow Canada Post a degree of flexibility to deal with emergent issues in providing postal services in rural areas.
42. The Panel believes that all parties – rural communities, rural postal outlet users, Canada Post, and the Government of Canada – would benefit from the specific inclusion of rural services in the USO. The Panel recommends that complementary details be included in the Service Charter to further delineate what the government expects Canada Post to continue to support, with respect to rural posts, over the long term. This would include specific reference to the minimum number and location of rural postal outlets, the access/service levels to be provided to rural Canadians and the process to be followed where post office closings, rationalizations or transitions are contemplated.
43. It is further recommended that these specific obligations be developed more fully by Canada Post through a meaningful consultative process involving rural Canadians, with its conclusions and the resulting approach being clearly explained and subsequently made publicly available via Canada Post’s website after approval by the government.
44. As well, it is recommended that the rural obligations required through the USO and the proposed Service Charter be subsequently included and fully reflected in Canada Post’s business and corporate plans.  

The proposed proximity-based approach to rural services discussed in Part II is intended to be considered in conjunction with this recommendation.

Delivery and access modes

The Advisory Panel notes that demographic, transportation, cultural and economic changes have altered and will continue to alter the character and distribution of communities in rural Canada.

45. In the spirit of balancing the USO with financial self-sustainability, and taking into consideration the evolving character of rural communities, lifestyles, and modes of transportation and communication, the Advisory Panel recommends that Canada Post proactively consult with rural communities, where opportunities are identified, with a view to reviewing and identifying alternative modes of delivery and access to the network that would serve community needs equally well and make Canada Post more financially self-sufficient.
46. The Advisory Panel recommends that Canada Post be permitted to use privately owned dealer outlets as a service delivery option in rural Canada, where established proximity and service criteria are fully met and maintained and where it is cost-effective to do so.
47. The Advisory Panel recommends 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.
48. The Advisory Panel recommends that the ongoing viability of end-of-lane deliveries (also known as rural roadside mailbox delivery) be reconsidered where potential traffic safety concerns exist as indicated through Canada Post’s ongoing rural traffic safety review. These concerns are of particular importance when the deliveries take place on routes served by roads where the posted speed limit is 80 km/h or higher.  

V – Governance

The Advisory Panel believes that invigorating the postal governance regime will go a long way in helping to realize the intended outcomes of the recommendations presented in the previous four sections.

Since the transformation of the Post Office Department into Canada Post, there has been a slow but steady transfer of authority and control from government agencies and departments to the Board of Canada Post. The recommendations of the Advisory Panel are a further step in this evolution.

49. As a guiding principle, and given Canada Post’s unique character and its largely commercial operating environment, the Advisory Panel strongly believes that oversight of the corporation’s business should rest primarily with the Board of Directors. The Financial Administration Act and the Canada Post Corporation Act clearly assign this function to the Board (FAA s. 109, CPC Act, s. 10). The Board is, and should be, accountable to Parliament through the minister responsible. In this context, the Advisory Panel recommends that the government re-examine its governance relationship with Canada Post, to ensure that the Board is permitted to exercise the authorities and flexibilities necessary to manage the corporation in a responsible and business-like manner, while fully respecting its USO responsibilities.
50. As a general objective, the Advisory Panel recommends that the respective roles, responsibilities and authority of the Board of Directors, Canada Post management and the government be updated, clarified, communicated to all, and made more accountable and transparent.

As a reinforcing observation, the Advisory Panel believes that it is important to simultaneously establish the appropriate level of corporate authority of the Board of Canada Post, while clarifying government oversight of the corporation.

The Board of Directors

51. The Advisory Panel recommends that the Board of Directors should have responsibility for the corporate viability of Canada Post and for Canada Post’s attainment of its USO responsibilities. To this end:
• The range of expertise and experience on the Board should extend across all corporate dimensions, from finance, accounting and commercial activity, to labour relations, technology and public policy and government;
• To ensure Board experience and expertise in the realm of public policy and government, the Advisory Panel recommends that the Board of Directors include a current or former deputy minister or associate deputy minister;  
• The Board’s nominations committee should play a central partnership role in making suggestions for Board appointments to the government for its consideration and approval;
• Board appointments should be for a minimum of five years and staggered to ensure corporate understanding and continuity at the Board level;
• The Board should have the authority to recruit, appoint and evaluate the CEO and senior management team, within parameters specifically agreed upon with the shareholder;
• To ensure the appropriate separation between the Board and the management of Canada Post, and to reinforce the Board’s oversight responsibilities, and in keeping with good corporate governance practice, it is recommended that the CEO not continue as a Board member;
• In the context of increased Board responsibilities and accountabilities, Board member compensation should be reviewed to ensure it appropriately reflects the responsibilities and accountabilities placed upon it by the government;
• In the context of ensuring the Board and the shareholder are in agreement, the parameters of CEO compensation, evaluation and any bonus incentives should be established between the Board Chair and the Minister and be in keeping with the general directions set by government;
• The Board should assume ownership of the Corporation’s relationship with the shareholder; and
• The Board should proactively review its public disclosure policies regarding corporate plans and annual reports with a view to ensure that Canadians are appropriately and reasonably informed.

The Board of Directors should also be held responsible and accountable for performance and results.

Clarification of power, authority, responsibilities

The Advisory Panel recommends that the powers, authority and responsibilities of the Board of Directors and of the government oversight bodies be formally clarified and communicated in an agreement between the Government of Canada and Canada Post. These would include:

The clarification of Board authority to:

• Borrow funds in the market, up to a certain level;
• Make acquisitions up to a certain level;
• Purchase and dispose of property;
• Set prices in competitive markets and recommend prices for Governor in Council approval in the exclusive privilege area;
• Alter the instruments or means adopted to pursue the USO;
• Pay dividends;
• Exercise its autonomy to invest and to act in new, directly related markets; and
• Formulate the corporate plan and budgets. 

The clarification of government authority to:

• Set targets in the Service Charter and the Financial Framework;
• Approve prices in the exclusive privilege area;
• Authorize expenditures and investment above a certain threshold;
• Limit the Board’s borrowing authority to a certain level;
• Approve corporate plans and budgets and required dividends; and
• Establish a scorecard for corporate performance.

53. There should also be formal clarification and articulation of the authority, responsibilities and expectations of the Minister’s portfolio department in support of the government’s postal oversight responsibilities.

Communication between shareholder and corporation

54. The Advisory Panel recommends that there be improved and regular communication between the government and the corporation. At a minimum, this should entail:

• Regular and scheduled Board Chair and Minister interactions and communications;
• Regular consultation between the Board and the Minister regarding Board appointments and the Board’s capacity matrix, to ensure that all appointments to the Board are of the highest quality, based on experience and expertise, and in keeping with board requirements;
• Regular and proactive contact between Canada Post management and departmental representatives during the preparation of the corporate plan to ensure a full understanding of what is intended and included;
• Establishing a process for the assessment of corporate performance within the Financial Framework and the Service Charter and to ensure that appropriate and timely feedback and discussion of results achieved occurs; and
• An annual in-camera meeting of the Minister with the full Board of Directors.  

Regulated prices

The Advisory Panel feels that the present process for approving regulated price changes – the ‘Gazette’ process – is neither effective nor functional: it lacks adequate consultation on regulated prices, public awareness of what the process is, and recourse to protest against or influence on the regulated prices. The Advisory Panel has concluded that the communication of regulated price changes should be made more transparent by requiring Canada Post to publicly advertise these price changes in national newspapers, as well as in the Canada Gazette and on their website as is the current practice, and to actively conduct a consultation process with customers on proposed price changes (other than those generated by the price cap formula).

The Advisory Panel recommends that:

• The use of a price-cap formula to set the basic lettermail rate should continue;
• Forecast increases to regulated prices should be included in the corporate plan over the five-year term of the plan so that proposed changes to regulated prices are linked to and flow from the corporate planning process;
• Regulated prices should balance the needs of customers against the principle that users should pay to cover the costs of postal services, and that pricing should contribute appropriately to Canada Post’s financial sustainability;
• There should be an active customer consultation phase as part of any pricing program; and
• A regulatory mechanism should be established to permit Governor in Council approval of short-term pricing adjustments to regulated prices on an exceptional basis.
   

Non-regulated prices

The Advisory Panel noted that businesses have expressed concern that increases to non-regulated prices are not well publicized and that customers lack recourse to protest against or influence Canada Post in the setting of those prices.

56. The Advisory Panel recommends that the communication of non-regulated price changes be made more transparent by requiring Canada Post to publicly advertise price changes in national newspapers as well as on their website, and to conduct a price consultation process with customers.

Postal intelligence in the postal governance regime

The Advisory Panel believes that effective postal policy and governance interaction requires that both the Board of Directors and the Government of Canada have good intelligence. There is a natural asymmetry in this regard, as Canada Post will clearly enjoy greater access to information and expertise and experience than government. This asymmetry can be dysfunctional in terms of good shareholder/corporate communications and interaction.

57. The Advisory Panel recommends that a greater symmetry of postal intelligence and knowledge be actively encouraged by both the government and Canada Post through:

• The establishment and support of a standing postal services working group comprised of senior level representatives from Transport Canada and central agencies which would work closely with Canada Post with the specific objective of proactively developing and subsequently maintaining a mutual understanding of the issues, challenges and opportunities arising from the provision of postal services to Canadians on a financially self-sustaining basis;
• The regular exchange of personnel (job-swapping) between the government and Canada Post to allow each to get a sense of the needs and expectations of the other; and
• The encouragement of independent postal research and intelligence by creating a university chair in postal studies, and by creating one or several positions of visiting postal research chairs on either the government or corporate side.
   

58. The Advisory Panel further recommends that postal intelligence within the government be strengthened through a Strategic Review of Canada Post every five years.

Postal councils

59. The Advisory Panel recommends that Canada Post create or maintain advisory postal councils to connect policy and decision-making with the Canadian public. These councils could include:
• A national advisory council for Canada Post (currently in place) to gauge future trends and developments;
• A major postal users council;
• A rural postal council; and
• A small and medium-sized enterprises council.
  

Dual department oversight

60. In the longer term, and specifically to ensure clarity of responsibilities, roles and expectations, the Advisory Panel recommends the introduction of a “dual department” postal oversight structure in Canada which would separate shareholder/financial issues from regulatory/social ones. This separation of ownership from regulation is standard operating practice in many postal regimes of the industrial world. The posts of Australia and New Zealand have been operating for several years under this model. The Advisory Panel recommends the following structure for Canada:

• The Board of Directors would interact directly on regulatory or social matters with the minister of a program department (currently the Minister of Transport) with respect to the USO and matters dealing with the Service Charter. The pricing of regulated products and related issues would also be dealt with in this relationship;
• The Board of Directors of Canada Post would interact directly on financial matters – dividends, profits, financing - with the Minister of Finance, who would be assigned financial or shareholder responsibilities to maintain and increase shareholder value. Financial targets and expectations would be discussed and determined in this relationship; and
• The interdepartmental working group recommended above would play an integral role in coordinating the government’s interactions with Canada Post.

Further discussion of the proposed nature of the dual department oversight model for Canada is presented in Appendix H.

ANNEX I: Proposed Service Charter

Concept Document for Discussion Purposes

Statement of Underlying Principles

1. The Government of Canada (“the Government”) and Canada Post Corporation (“Canada Post”) are committed to providing a high quality and universal postal service to all Canadians wherever they may live in Canada, as outlined in this proposed Service Charter;

 
2. The Government and Canada Post commits to the principle of working together proactively to ensure a mutual understanding of the issues, challenges and opportunities that exist regarding the provision of acceptable postal services to Canadians on a financially self-sustaining basis;

 
3. The Government and Canada Post endorse a consultative process with affected groups to establish processes and/or developments that are designed to improve, change or guarantee delivery of the universal postal service;

 
4. The Government and Canada Post accept that maintaining a high quality and universal postal system for Canadians is dependent on measures to maintain Canada Post’s financial sustainability (see the proposed revised Financial Framework); and

 
5. The Government and Canada Post agree that, to the extent that this is a dynamic agreement, changes will be made by mutual consent and appropriate consultation whenever possible, with each party recognizing and respecting the authority and accountability of the other.

Universal Service Obligation (USO)

1. Canada Post will maintain a universal, effective and economically viable postal service.
    
2. The universal service obligation includes the following basic ingredients:

 
• Any resident of Canada will be able to communicate, transact business, and send or receive letters, parcels or publications (books, magazines, periodicals and newspapers) by mail and from every address in Canada and to and from other countries;
• There will be national collection, delivery and access (retail) networks that allows this in a timely and convenient manner;
• Free mail service will be provided for materials for the blind; and
• The USO will be provided with reasonable service standards and at affordable and reasonable prices, including a single price for basic lettermail.


3. The USO will apply to both individual residents of Canada and to businesses operating in Canada.

 
4. The Government of Canada and Canada Post agree that the provision of postal services to rural regions of the country is an integral part of Canada Post’s universal service obligation.

Reserve Area

5. The Government of Canada grants to Canada Post the exclusive privilege to collect, transmit and deliver letters in Canada as specified in the Canada Post Corporation Act to underpin the financial costs of the universal service obligation. This applies to both domestic and outbound international lettermail unless changed by legislation.

Delivery Standards

6. Canada Post will deliver parcels, lettermail and publications daily (meaning every working day, Monday through Friday, except for holidays).

 
7. Canada Post agrees to deliver:

 
• At least X* per cent of local mail within two working days;
• At least X* per cent of regional mail within three working days; and
• At least X* per cent of national mail within four working days.


8. Canada Post agrees to guarantee:

 
• Daily service to at least X* per cent of the Canadian population;
• Service three times per week to at least X* per cent of the Canadian population;
• Weekly service to 100%* of the Canadian population; and
• Canada Post will provide a list to the Government of all communities that do not receive daily service, with an appropriate rationale.

 
9. The formula and the list outlined in Article (8) above will be made public and reviewed regularly. Any changes to this list must follow prescribed procedures.

Retail Network

10. Canada Post will provide a network of postal outlets using a variety of forms – corporate offices, private dealer outlets in commercial shops, and so on. The postal outlet used in any community should be appropriate to the circumstance. There shall be no less than X* number of postal outlets in total in Canada.

 
11. Canada Post may consider changes to the network of postal outlets, following prescribed procedures.

 
12. As part of its Annual Report, Canada Post should present an assessment of the cost-effectiveness and financial sustainability of the postal outlet modes and alternatives, so that policy-makers and Canadians can evaluate the ‘value-for-money’ character of each of the delivery instruments.

Rural Postal Network

13. The Government and Canada Post agree to adopt a new definition of “rural” for postal purposes to be established initially “as communities with a population of 10 000 or less.”

 
14. To ensure that rural service needs of rural Canada are met on an ongoing basis and to provide Canada Post with the operating flexibility necessary to meet its ongoing obligations to its shareholder, the following provisions will become effective on the date of this Charter:

 
1. All active postal outlets in place on the date the Charter becomes effective shall continue in service unless decreases in service levels are made in full compliance with this Charter;
2. For clarity, Canada Post will prepare a list reflecting all active postal outlets and the service levels provided by each as of the effective date;
3. For clarity, a change from a corporate post office outlet to a private dealer operated outlet, or vice versa, is not considered to be either a closure or a change in service level;
4. To ensure all rural Canadians continue to receive acceptable levels of service in the future, a proximity-based model **** specifying maximum access distances to postal outlets will be adopted;
5. The proximity-based distance criteria within the model will be as follows:

 
1. 100% of Canadians shall have access generally equivalent to that available to them as of the effective date of the Charter**, unless changes are made in full accordance with the procedures prescribed herein;
2. 98% of Canadians shall have access to a postal service outlet within 15 kilometres of their residence **; and
3. 80% of rural households shall have access to a postal service outlet within 7.5 kilometres of their residence ***;


6. To provide further certainty, Canada Post will be required to maintain a minimum of Z = (Y-20) postal service outlets in rural Canada, where Y equals the number of active postal outlets in service as of the effective date of this Charter. (Note: 20 outlets were selected to provide Canada Post sufficient flexibility to deal with emergent issues and to permit the approach to be adequately tested);
7. The minimum number of active rural postal outlets, Z, may be decreased only through a separate and specific approval process to be prescribed by the Minister and to be considered in conjunction with, but approved separately from, Canada Post’s annual corporate plan;
8. Community consultations *** by Canada Post will be required to be an integral part of any local postal outlet closure or rationalization which may proceed only after due consultation with local authorities;
9. The Ombudsman is designated as the party to whom directly affected communities or parties can direct complaints regarding the process and/or approach used by Canada Post on a community specific basis. The Ombudsman will provide his conclusions and any recommended course of action to the Board Chair for consideration and action; and
10. The Board will be accountable to the Minister responsible for ensuring Canada Post’s compliance with the required parameters noted above. The Board Chair will specifically report on all closures, rationalizations and level of community concern with the outcomes to the Minister as part of the annual meeting between the Minister and the Board or as may be otherwise requested by the Minister.

Delivery Modes

15. Canada Post will deliver mail using a variety of delivery modes – mailbox service at the door, community mailbox, post box in postal outlets, end-of-lane delivery, and so on. The delivery mode used in any community should be appropriate to the circumstance.

 
16. Canada Post may consider changes to the delivery network and submit proposals to the government for consideration as part of the annual corporate planning process.

 
17. As part of its annual report, Canada Post should present an assessment of the cost-effectiveness and financial sustainability of the delivery modes and alternatives, so that policy-makers and Canadians can evaluate the ‘value-for-money’ character of each of the delivery instruments.  

Regulated Prices

18. Domestic and international postage rates for letters under 500 grams will be set in the Lettermail Regulations and the price will be uniform regardless of the distance travelled.

 
19. In addition to the requirements outlined in the Canada Post Corporation Act, Canada Post agrees to publicly advertise proposed changes to the prices of regulated lettermail products in national newspapers and on the corporation’s website, and to actively conduct a consultation process with customers on proposed changes.

Non-Regulated Prices

20. Canada Post commits to providing affected Canadians with readily available and timely information on planned future increases in the prices of unregulated mail to allow sufficient opportunity for comment and feedback on changes proposed and to permit business customers a reasonable time to adjust their business practices and models.

Compliance Assurance

21. If the Minister receives an allegation that Canada Post is failing to comply with the terms of the Service Charter, the Minister may refer the allegation to Canada Post for investigation and follow-up, as the Minister deems appropriate. Upon referral of any such allegation, Canada Post shall consult in a timely manner with the Minister on the accuracy of the allegation, advise of any measures that it had taken to date to resolve the issue, and of any corrective measures that may still be required. The Minister in the final instance shall decide whether the actions taken are acceptable and appropriate.

 
22. This Charter is an agreement between the Government and Canada Post. It is not intended to create any right or obligation with any other party.  

Reviews and Amendments

23. The Government and Canada Post will review developments under the Service Charter annually to:
1. Assess the extent to which the objectives of the Service Charter are currently being met;
2. Identify and assess factors that could have a material impact on future performance under the Charter; and
3. Identify potential areas where alterations or revisions might be practical or warranted to address both current and expected future challenges to delivery of the service targets.

 
24. Canada Post will include a Service Charter Performance Report in its annual report.

 
25. Amendments to this Charter will follow separately prescribed procedures.

 
26. The Government and Canada Post agree to review, assess and renew the Service Charter every five years.

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* Given Canadians reported general satisfaction with postal services, it is recommended that these numbers/percentages be those actually in place and/or publicly reported by Canada Post (subject to auditable verification) on the effective date of the Charter.
** Canada Post should be required to provide current and verifiable metrics, which would form the “ benchmark” at the time the Charter is put into effect. It is expected that the proximity-based model may require adjustment if the “actuals” vary substantially from the percentages proposed or the need for modifications are otherwise indicated.
*** Canada Post has a proactive community consultation process in place that should form the basis of future community consultations. It is recommended that a review of the general satisfaction of communities recently engaged through this process be undertaken and adjustments made to the process as deemed appropriate as a result.
**** It is recommended that a consultation with representative rural Canadians be undertaken to verify the suitability/acceptability of the proximity model proposed.

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NOTES
* This framework was prepared by TDSI for the purposes of the review as an illustration of how a financial framework may change as Canada Post transitions to a steady state both financially and operationally. The ratios were derived after examining the characteristics and financial metrics of companies in the telecommunications, pipeline and utilities, and courier industries as well as those of peer postal administrations.

1. Investment Phase: The capital-intensive phase of modernization includes one-time operating expenses and increased interest expenses that may temporarily impact profitability. It would be appropriate to suspend dividends to enable reinvestment. This phase would be marked by a wider capital structure range.

 
2. Transition Phase: This phase would be marked by decreasing capital intensity. Targeted savings would start to be realized and dividend payments would be resumed albeit at reduced levels.

 
3. Steady State: Capex intensity returns to maintenance levels as the modernization program concludes. A steady state revised Financial Framework would be appropriate. Cash flow would be available to fund the next investment phase (alterations and renovations and/or the next modernization plan).

1. EBITDAR refers to ‘earnings before interest, taxes, depreciation, amortization and rent’. This is an indicator of financial performance and profitability. The debt to EBITDAR ratio demonstrates debt relative to cash flow. A ratio that is below the range may indicate that Canada Post is underleveraged and a ratio that is above that range may indicate that Canada Post has too much debt.

 
2. Total Debt/Book Capital provides an assessment of how the firm is leveraging its capital. When attained, ratios (1) and (2) will support Canada Post’s case to obtain an investment grade rating appropriate to access the debt capital market.

 
3. Canada Post’s liquidity can be assessed by the EBITDAR minus capex divided by Interest ratio, where capex refers to maintenance capital expenditure. This ratio shows the ability of Canada Post to generate sufficient cash flow to cover interest expense after maintenance capital expenditures. The ratio reflects an estimate of the recurring cash generated by the business that can be used to cover debt and lease costs.

 
4. EBITDA- 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.

 
5. ROE - Return on book equity provides proxy indicator of the return that Canada Post would have to demonstrate to the market so that it would be able to attract equity investors.

 
6. Dividend Payout Ratio is another proxy indicator of the level that Canada Post would have to achieve so that it would be able to attract equity investors.

 
7. Credit Rating will be determined by credit rating agencies taking into account the risks inherent in the businesses of Canada Post, its financial performance, the strength of its monopoly and implicit support provided by its shareholder.

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(x) Operating leases capitalized using a multiple of 7.0X
(y) Interest includes lease expense

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