House of Lords - European Union

Select Committee on European Union Second Report

THE FURTHER LIBERALISATION OF COMMUNITY POSTAL SERVICES

PART 2: THE VIEWS OF THE WITNESSES

18. The current proposals are aimed at opening up a further 20 per cent of the European postal market to competition. The Post Office believes that in the United Kingdom this would leave it with 60 per cent of its existing revenues in order to sustain its universal service obligation (Q74). Change is controversial. In evidence, many witnesses believed that further liberalisation was both desirable and, ultimately, inevitable. The differences appear over the pace of change.

19. The commercial mail users, those companies which see opportunities in a liberalised postal market, and those Member States which have already liberalised their postal services or, like Germany, are in the process of so doing, argue for rapid liberalisation and the setting of a date by which all Member States will have opened their postal markets to competition.

20. Those who argue against haste are those organisations which feel they have most to lose by rapid change: the Post Office, the Unions and the Consumers in Europe Group (CEG).

21. All witnesses believe that it is vital for all Member States to maintain a universal service obligation at a uniform and affordable tariff. The existing definition of what the EU considers should constitute the universal service obligation is set out in Chapter 2, Article 3 to 6 of the Postal Directive (97/67/EC dated 15 December 1997).

22. Witnesses have responded, directly or indirectly, to the three questions posed in the Call for Evidence. This evidence is reviewed below. The first question was:

What Benefits would be likely to result from the proposed liberalisation measures?

THE COMMISSION'S VIEW

23. The Commission argues that liberalisation will produce more efficient markets and therefore better services, that it would be implementing the internal market, that in many cases it would be catching up with what is actually happening in the market already, and that opening the market is not only an opportunity, but is essential if post offices are to compete with the new technologies. The Commission adds that its proposals form part of a gradual opening.

24. Before the implementation of the 1997 Directive, 27 per cent of universal service providers' postal revenues, on average, was open to competition. The 1997 Postal Directive opened approximately an additional 3 per cent of the universal service providers' revenues from postal services, leaving 70 per cent of total postal services revenues, on average, in the reserved area. The total market opening proposed as the next step to be implemented from 2003 would represent an additional 20 per cent of these revenues which would mean that up to 50 per cent of the universal service providers' revenues from postal services could be maintained within the reserved area (Para 2.4 of the Explanatory Memorandum covering the Commission's draft proposals).

25. For a second level of benefit, the Commission argues that their proposals constitute a controlled market opening because Member States will be acting on the basis of consensus and will be reflecting the reality of the market.

26. The Commission claims to have examined the financial equilibrium of the universal service obligation and to have concluded that the universal service obligation would be economically viable in a situation of progressive market opening.

27. National legislators and regulatory authorities would be empowered to ensure a smooth implementation according to national political requirements.

REDUCING THE RESERVED AREA BY WEIGHT/PRICE FORMULA

28. The specific benefits of the proposed measures, particularly in the reduction of the 50 grams weight limit, would be that it will be easy for regulators to enforce and will allow limited competition thus ensuring that the implementation of the proposal would be gradual and controlled. The Commission argues that a lower limit — 20 grams — would be too much, too quickly, as it would increase the market opening from 20 per cent to 32 per cent of Postal Revenues. On the other hand, a larger limit, say 100 grams, would reduce the increase in market opening from 20 per cent to 14 per cent, which would not lead to substantial market entry, and would not, therefore, make the required difference to postal operators to oblige them to be efficient.

OPENING OUTGOING CROSS-BORDER MAIL TO COMPETITION

29. This is already the de facto position in ten Member States including the two countries with the highest volumes of outward cross-border mail (Ireland and Luxembourg).

REMOVING THE PRICE LIMIT ON EXPRESS MAIL

30. There is a principle already well established in the existing postal directive that new services in the sense of services that are "quite distinct from conventional services" do not form part of the universal service and consequently there is no justification for their being reserved to universal service providers.

THE DEFINITION OF SPECIAL SERVICES

31. These services are already out of the reserved area under the existing directive and the current proposals do not seek to change this. The Commission in seeking to reinforce the definition of special services characterises special services as those which must meet three conditions:

(a) they must be clearly distinct from the universal service;

(b) they must meet specific customer requirements; and

THE FURTHER STEP IN 2007

32. When the current proposals are implemented there will be a further review in 2004, which will focus on how to guarantee universal service in an appropriate manner in a fully competitive market. The Commission proposes that the review last for two years and aim for complete liberalisation from 2007. (In the first draft of these proposals the Commission had hoped to agree 1 January 2007 as the final date for full liberalisation, but they were obliged to accept the current compromise position.)

THE VIEWS OF OTHER WITNESSES

33. The Association of International Courier and Express Services (AICES) recognises the need for the European Commission to find common ground in favour of further liberalisation but is disappointed that the final (i.e. current) proposals have been diluted in comparison to earlier drafts. It argues that the Commission was widely expected to propose full liberalisation as of 2003, but the final proposals presented by Commissioner Bolkestein reserve the majority of direct mail items (items up to 50 grams) for Europe's monopoly holders. AICES claims that the level of liberalisation proposed is the bare minimum necessary. It is also concerned about the lack of a final date for full liberalisation, partly because it implies not only delays in much needed reforms of the public postal operators, but also because it implies a delay in the completion of the single market. AICES states that liberalisation encourages competition and that increased competition will stimulate the reform of public postal operators into efficient, cost-aware and above all, customer-orientated companies. The abolition of monopolies will end distortions of competition between different parts of the communications market.

34. The Direct Marketing Association (United Kingdom) Limited argues that full liberalisation will lead to growth in the postal sector and stimulate new services, new job opportunities, and an overall increase in employment. It will not undermine the ability of the universal service providers to sustain the universal service obligation at an affordable and uniform price. The Association adds that the entry of new private operators through full liberalisation will help to develop a better and more efficient postal service. The Association's main concern is, of course, direct mail where the Association argues that full liberalisation of direct mail should occur by 1 January 2003. The Association adds that direct mail is already liberalised in six European Union countries (see paragraph 90).

35. The European Express Association (EEA) regrets that the Commission's proposals do not adequately address the need for increased competition in Europe's postal market. The EEA argues that customers increasingly want a wider range of new services with a good price/quality ratio and also freedom of choice between service providers world-wide. Therefore, the single market for postal services should be completed as in all other sectors. The price/quality ratio of the postal product must be improved and only increased competition can guarantee this. The development of new products will be stimulated; increased competition will stimulate the reform of public postal operators into efficient, cost-aware and above all customer-orientated companies. The abolition of monopolies will end distortions of competition between different parts of the communications market. The EEA goes onto argue that the Directive should include 1 January 2007 as the final date for full liberalisation claiming that without a final date the public postal operators (PPO) will have no real incentive to improve their services, or to take advantage of the dynamics of the internal market.

36. The Mail Users' Association stresses the benefits of fair competition in the postal market place. Not only does competition offer choice to the customer and therefore downward pressure on prices but it also acts as a catalyst for increased quality of service levels. It regards the reserved sector of the market — the Royal Mail's £1 monopoly — to be disproportionate to the sums needed to support the universal service. The MUA argues that business mailers expect the benefits likely to result from the current proposals to be limited and could only be regarded as firm steps in the right direction if they are inextricably linked to a published timetable for further liberalisation.

37. United Parcel Service (UPS) lists the benefits likely to flow from liberalisation, thus:

The single market for postal services should be completed as for other sectors;

The price/quality ratio of postal products should be improved — increased competition alone can bring this about;

Liberalisation will stimulate the development of new products and encourage innovation in the postal sector;

Increased competition will stimulate the reform of public postal operators into more efficient cost-aware and above all customer-orientated companies;

The abolition of monopolies will end distortions of competition between alternative segments of the communications market.

38. UPS further insist that the Directive should include a final date for full liberalisation and that this should be 1 January 2007.

39. Deutsche Post together with TNT Post Group NV, Posten AB and Finland Post Limited declares itself to be "in favour of a full and swift, and yet gradual and controlled liberalisation of the European postal market", but Deutsche Post itself does not spell out the benefits it expects the current proposals to bring.

40. TNT Post Group NV's position is admirably summarised in its evidence:

Without competition there is no innovation;

Without innovation, postal services will be substantially substituted by other media within a decade!

TNT

41. Posten AB, the Swedish Post Office, is one of the few liberalised postal services in Europe. This was achieved in 1993 when the monopoly on letters was abolished in a single step. Posten AB argues that to safeguard the universal service, the European postal industry must compete on equal terms with other service providers in expanding European communications and logistics' markets. Not only is liberalisation itself desirable, it should come as quickly as possible. A prolonged process will jeopardise the long-term future of the postal sector including employment, affordable prices, and last, but not least, the universal service itself.

42. The United Kingdom Post Office supports the view that the introduction of competition in the postal market will produce benefits in efficiency and service quality, reductions in price and increases in choice for all customers. Competition provides an opportunity to encourage innovation and to increase efficiency and productivity. Nevertheless, The Post Office sees potential conflict between the introduction of competition as required by the European Commission's proposals and the universal service obligation (USO) as set out by the Government in the Postal Services Act 2000.

43. The CWU/CMA also state that they are not opposed to a measure of liberalisation in the provision of postal services but, quoting the Postal Directive, believe that such liberalisation should be gradual and controlled and not at the expense of universal service and uniform tariffs. The proposals cannot, in their opinion, be considered either gradual or controlled.

44. The National Federation of Sub-Post Masters is less attracted to the idea of liberalisation. It prefers to regard modernisation of the postal sector as the catalyst for exploiting new technology and delivering an efficient high quality service to members of the public and businesses. "NFSP is concerned as to whether liberalisation will in fact produce benefits in efficiency, reductions in price and increases in choice for all customers."

45. The Royal National Institute of the Blind (RNIB) does not take a view on whether the postal sector should be liberalised/privatised or not. "The central concern of blind and partially sighted people and their organisations is that any moves towards further liberalisation of postal services should not threaten the continuation of vital freepost Articles for the Blind services…"The RNIB draws heavily on the experience of New Zealand where it claims liberalisation did not improve the position of visually-impaired people.

46. The Consumers in Europe Group (CEG) offers no judgments on benefits likely to accrue from the current proposals for further liberalisation. Their concern focuses exclusively on the maintenance of the universal service obligation at a uniform tariff and affordable price. The CEG also emphasises the social importance of the continued existence of post offices, especially in rural areas.

47. The Government does not express an overt opinion in its evidence about the benefits of liberalisation though its position can be inferred from the fact that the Government is already putting in place a new legislative framework for the regulation of the United Kingdom domestic postal market to give the Post Office the commercial freedom to operate effectively in a dynamic and changing global market. The Government supports further liberalisation of the European postal market consistent with maintaining the universal service obligation.

48. The second question was:

What problems could result from the proposed liberalisation particularly in terms of maintaining universal service with an affordable and uniform tariff structure?

49. The proponents of liberalisation claim to see no real problems in the Commission's current proposals and, by and large, expect them to allow national licensees to operate a viable universal service with affordable and uniform tariff structures though they do not attempt to define any of these terms. For example, AICES regards the price and weight limit, as proposed by the Commission, as a modest step in the right direction and argues that it is the absolute minimum necessary at this time. AICES favours full liberalisation of the market. It welcomes the Commission's proposals on outbound cross-border mail recognising that this is effectively liberalised already in all Member States. AICES appeals to the Commission to re-examine the issue of inbound cross-border mail and strongly opposes the view that it is necessary to maintain the monopoly in this area of the market.

50. The Direct Marketing Association argues that the proposed measures would have no effect on the universal service obligation nor The Post Office's ability to provide a universal service at an affordable price and standard tariff. It welcomes full opening to competition of outward cross-border mail but argues it should be accompanied by full opening to competition of inward cross-border mail. Its own specific theme is that direct mail should be fully liberalised by 2003 and if this is not possible under the present proposals, then a fixed deadline for liberalisation should be set.

51. The European Express Association takes a similar line. The EEA argues that the Commission's current proposals do not change the obligation to provide a universal service and that the position of a universal service and a fully liberalised market are not mutually exclusive. The EEA adds however that the universal service obligation should meet the most important criteria: the provision of a good and affordable basic postal service. If postal services lag behind the communications market as a whole, they risk losing the very basis on which the social role (i.e. universal service) is built. The current Commission proposal liberalises a mere 20 per cent of the currently reserved area, which EEA regards as sufficient to guarantee the universal service obligation. United Parcel Service's evidence makes the same claims in almost identical language.

52. The Mail Users' Association argues that it is extremely unlikely that any potential competitor would regard it feasible to develop a national network based on the present proposals, that the existing universal service to all postal addressees in the country will continue to be provided by the national carrier. The MUA considers the universal service obligation will be maintained satisfactorily but is concerned about The Post Office's future investment in infrastructure, given the heavy burdens they are being allowed to take on in terms of their international acquisitions, allowances and joint ventures. MUA concludes that while maintaining the universal service is likely to continue in much the same fashion as today, sending items that fall outside the postal monopoly is likely to cost the customer more.

53. Posten AB is required by the Swedish Postal Services Act to maintain a universal service. Posten AB argues that the liberalisation of the European postal industry has to be put into effect as swiftly as possible in order to safeguard the universal service and that it is important to concentrate more on the content of the postal service than on the structure of how to offer a service. A flexible organisation enabling postal operators to adapt to market changes, quickly shifting customer demands, and different local solutions for service is the best way to safeguard the maintenance of universal service to all citizens. Posten AB ends its evidence by quoting the Swedish Regulator, the National Post and Telecom Agency's statement in their latest report on Swedish liberalisation.

"There is nothing in the Swedish experience that may indicate that competition in the entire postal market should be regarded as a problem. Instead it should be considered a solution to the challenges facing the Postal World in a new environment dominated by Information Technology and globalisation."[

54. TNT Post NV also argues that a universal service can be maintained in a liberalised market, that the purpose of the universal service obligation is to safeguard the ability of the general public to communicate regularly at a reasonable cost. TNT Post N.V. goes on to suggest that the concept of universal service needs to be flexible and dynamic to take account of the rapidly changing ways in which we communicate. TNT Post NV also points to fully liberalised postal markets in Sweden, New Zealand and Argentina which, they claim, demonstrate that a universal postal service can be preserved even in a fully liberalised market. If they have a problem with the Commission's proposals, it is that they do not go far enough, fast enough.

55. Deutsche Post ignores the issue and argues only that a final date for full liberalisation must be set.

56. The United Kingdom Post Office finds considerable difficulty in accepting that the reduction of the reserved areas to 50 grams would enable it to maintain a universal service. It argues that the directive proposes a reduction in the scope of the reserved area of such an extent that, if implemented in 2003, would lead to a financial impact on the Post Office that would almost certainly push it into loss. This would undermine the ability of The Post Office to continue to meet the social obligation laid down in the Postal Services Act 2000 to provide a universal service at an affordable and uniform tariff. The Post Office therefore strongly prefers a reduction in the reserved area limited to 150 grams arguing that if this proved too generous, further reductions could be made. If the reduction was made immediately to 50 grams, the process would be irreversible. If it was subsequently found that the universal service obligation could not be sustained by a reserved area measured by the 50 grams weight/price figure, it would be too late to do anything about it.

57. The Post Office also has problems with the Commission's definition of special services which it believes could be used to undermine the integrity of the reserved area in that it would remove legal certainty from the definition of the reserved area, and would risk opening up all bulk mail to competition through what would, in effect, be deregulation by means of court actions.[3]

58. The CWU/CMA is also concerned that the proposed reduction of the reserved area by weight/price to 50 grams would lead to a substantial loss in postal operators' revenues which would have the effect of undermining The Post Office's profitability. In addition, the proposal constitutes a direct threat to the uniform tariff currently operated by universal service providers. It adduces evidence from a study by Toulouse University which estimated that a fully competitive market would generate highly differential prices with rural customers paying tariffs more than four times those paid by commercial customers.

59. CWU/CMA's final point is that these proposals would also lead to a dramatic loss in jobs. It points to the experience of countries which have already liberalised such as Germany, Sweden or New Zealand where cuts in jobs in the main postal operator have been as high as 40 per cent. CWU/CMA also believe that a review in 2004 — only one year after the next step in the liberalisation process, is too sudden and does not accord with the "gradual and controlled" liberalisation process which Member States had agreed in the original directive.

60. The National Federation of Sub-Postmasters (NFSP) also believes that a sudden reduction to 50 grams might eliminate Post Office profits and that The Post Office would be left unable to maintain a viable business or to sustain a universal service for customers. The NFSP also makes the point that liberalisation tends to be irreversible and therefore needs to be carefully thought out before implementation. It is concerned that too radical a liberalisation would result in a serious reduction in the funding available through The Post Office to support sub-post offices.

61. The RNIB is concerned with safeguarding political support for the freepost Articles for the Blind service at European Union level. Such a commitment has been less forthcoming at a European Union level than in the United Kingdom. The European Parliament did demonstrate support for such schemes by amending the 1995 Directive Proposal to ensure that liberalisation would not threaten free post schemes in different Member States, but the European Commission was not enthusiastic about such amendments. The compromise, eventually agreed to, was to permit Member States to continue such schemes. The RNIB's main worry is that the current proposals might lead to a reduction in the commitment to continue to support this scheme.

62. The Consumers in Europe Group (CEG) believes that the letter monopoly held by most European Post Offices should be reduced as far as possible in order to encourage lower prices, better service, and more choice for consumers. Consumers want the universal service at a uniform and affordable tariff to be maintained. CEG therefore favours a step-by-step approach to liberalisation reducing the monopoly of the universal service providers for direct mail to 150 grams as a first step, with further reductions depending on the outcome of the Commission's review of the situation at the end of 2004. CEG adds that 2004 might in practice be too early for a full assessment. CEG goes on to argue that the reserved area should be strictly proportional to the cost of providing the universal service and would wish the Commission to provide strict guidelines for the operation, transparency and control of any compensation fund that each Member State might be allowed to set up to ensure the maintenance of the universal service in the event that the reserved area could not cover the universal service providers' costs. CEG also urges the Commission to provide a definition of "affordable" as specified in the 1997 Postal Services Directive.

63. Mr Brian Simpson MEP, stresses the threats that the current proposals make to levels of employment and argues that a cut in the reserved area from 350 grams to 50 grams in one move is not, in his opinion, either controlled or gradual. He adds that Postcomm must ensure that its decisions are consistent with European Union decisions. The proposal to reduce the reserved area to 50 grams puts at risk the financing of the universal service throughout the United Kingdom, and a reserved area of 150 grams including direct mail is necessary in order to ensure a viable universal service throughout all parts of the United Kingdom. Mr Simpson adds that further liberalisation after the present proposals have been implemented should be taken carefully and not hurried.

64. The Government's position has been affected by domestic legislation. The Postal Services Act 2000 is designed to establish a new regulatory framework and a regulator, the Postal Services Commission, PostComm, with responsibility for preserving the universal service obligation. Under this new framework The Post Office will no longer have a monopoly but will be licensed to operate in a reserved area. This reserved area which is broadly similar in scope to The Post Office's current monopoly area, will be regulated by PostComm who will be able to license other players in the market consistent with its obligation to ensure a universal service obligation. The Government identifies two particular problems from the European Commission's proposals:

(ii) the reduction of the reserved area by price/weight.

On the special services issue, the Government argues that further work needs to be undertaken to define such services to ensure that they do not put at risk the legal certainty provided by the weight/price definition of the reserved area nor be used as a device to render the reserved area void. On the question of the definition of the reserved area by weight/price, the Government recognises that this is currently consistent with United Kingdom practice except that the levels proposed do not match the current tariff structure of the Post Office. The Government's position, however, is that this is a matter for the new regulator and that in the words of the minister, Mr Alan Johnson MP, the regulator's report would be a major input in the government's considerations (Q 344).

65. The French Post Office, "La Poste", finds little virtue in liberalisation, approves the European Commission's willingness to maintain a reserved sector and to fix its contours on the basis of weight and price, but does have strong reservations. It thinks the proposed weight/price limits are too low and the introduction of new concepts of special services and traditional services misleading. The announcement of new proposals for 2004 and beyond without assessing the measures expected to come into effect in 2003, is too sudden a step. The French Post Office also suggests that liberalisation of special services poses problems of legal certainty. As regards the weight/price limits, the French Post Office "like most other European operators" will accept a reduction to 150 grams and three times the base tariff. The French Post Office adds that the Commission's proposals go against the principle of a gradual and controlled opening to competition.

66. The third question was:

Are there any measures not identified in the Commission's proposals, which would help the Commission's stated aims for postal services?

67. Fewer witnesses responded to this question. The Mail Users' Association argues that the key issue for business mailers is that liberalisation in the market place needs to be sustainable. For the MUA the current proposals do not go far enough to support long term competition. MUA argues from the experience of the telecommunications market, that it would be feasible to offer potential postal operators access to the national carriers distribution network "downstream", and thus enable them to provide competitive services for all mail streams aimed at a specific region. By licensing competitors in this way it would be possible to analyse the effects of competition on the universal service (both financially and socially) while at the same time offering the competitor a viable platform from which to grow. Provided that the end results of this competition did not compromise the universal service obligation, and that the licensed carrier was proficient and in a position further to develop its systems, the postal regulator could then expand the controlled test-bed further afield.

68. The CWU/CMA argues that the process of liberalisation should be "gradual and controlled" and that after a couple of years' experience of the current proposals, there should be a thorough review which looked at the impact on service levels, prices, profitability and employment. Only in the light of such a review should further proposals be drawn up in respect of any further liberalisation in 2007 or at any later date. This is a view echoed by the National Federation of Sub-Postmasters.

69. The Government suggests that Postcomm will want to see whether the European Commission's proposed directive leads to equivalence across Member States. The United Kingdom postal services operate in a completely open market outside the reserved area. EC legislation permits licensing regimes outside the reserved areas but the Government believes there should be consistency between the two areas.

70. The French Post Office is critical of the failure of the Commission to address the consequences of its proposed amendment to Article 7 of the Postal Directive. The Commission's proposal envisages a two-stage approach to the market-opening process. The first step is the reduction, with effect from 1 January 2003, of the maximum weight and price limits of the postal services which Member States can reserve to their universal service providers. The second is a decision on a further step towards opening the postal market with effect from 1 January 2007. That decision would be taken by the European Parliament and the Council by 31 December 2005. The French Post Office's concern centred on the Commission's statement: "Failing such a decision, the amended Postal Directive would cease to apply on 31 December 2006". The French Post Office said that the introduction of "the notion of nullity" would create "a strong element of legal uncertainty prejudicial to the whole postal sector". Further, there was "a major contradiction…. The Commission cannot plead for the universal service at the same time as proposing the removal of the regulatory framework, which guarantees it, in the event of disagreement on review of the directive".

71. According to the Commission, this French reference is to the lapsing mechanism which is in the 1997 Directive, and which has not so far been challenged there. The Commission now seeks to transfer it to the amended Directive. The Directive is a balance between obligations and the reserved area required to meet those obligations. The balance includes moving towards further liberalisation. If that balance were to be broken through decisions on future liberalisation not being taken as required by the Directive, then the whole Directive would lapse and the competition rules would apply. A Directive would then be brought forward under Article 86 of the EC Treaty. That is of course possible now but the political choice has so far been made to try to open the market through harmonisation. In short, either the postal services accept controlled liberalisation through consensus and political compromise, or the Commission could put forward a Directive based on internal market competition rules which would, it is implied, look less kindly on reserved areas.

72. The French Post Office also observes that "the European market today is the market most open to competition in the postal sector world-wide. In comparable countries such as the United States, Japan or Switzerland, the monopoly is guaranteed within the following limits:

Japan: 2 kg

Switzerland: 2 kg, including parcels

USA: US$3 (this monopoly changes in line with the weight of items dispatched and can, for example, reach US$6 for a package weighing 1 kg)."

The French Post Office concludes that the continued opening of the European market would be to the detriment of European interests, which would, in addition, be weakened in negotiations at the World Trade Organisation (WTO).

2 National Post and Telecom Agency, "The Liberalised Swedish Postal Market". Available at www. pts.se. Back

3 What The Post Office means by this is that the proposed definition of special services is so imprecise that competitors might establish services, which could be challenged in court for transgressing The Post Office's monopoly. If the court nevertheless found such services to be "special", as defined in the current proposal, they would then be held to be outside the reserved area. Back