08/12/2013 12:02 EDT | Updated 10/12/2013 05:12 EDT

The Best Way to Save Canada Post

Canada is lagging major countries that have ended the monopoly of their national postal services, with regard to letter mail. Canadians need only look to the U.K., where a transplanted Canadian (not Mark Carney, but Newfoundlander Moya Greene) has turned incremental reforms into privatizing the remaining government mail services.

A similar, but made-in-Canada reform approach would not entail full, immediate privatization of postal services, but rather the gradual introduction of contracting arrangements for more Canada Post services. A Canadian approach of arranging contracts for various operations could be effected without compromising coast-to-coast uniform service standards and pricing, or existing jobs.

The federal government owns, but provides significant autonomy to, Canada Post. Ottawa has made Canada Post the only organization that can collect or deliver letter mail, but has tasked the corporation with the obligation to serve all addresses, known as the universal service obligation. Despite having been a profitable corporation in past years, Canada Post faces a number of potential challenges.

Domestic mail is forecast to decline by 27 per cent from 2012 through 2020.

Canada Post has a pension solvency deficit of $5.9-billion in 2012.

Regular absenteeism is also a major concern. Wages and benefits for replacement workers amounted to $310-million in additional costs to Canada Post in 2007.

The bottom line: Canada Post is forecast to have an annual operating deficit of $1-billion by 2020 if it does not enact any new reforms.

The primary objective of Canada Post is to provide a universal service at the same price to consumers across the country. Canada Post uses profits from urban routes to sustain unprofitable rural routes to fulfil the obligation to service all areas of Canada.

Any reform of Canada Post must address the extent of government monopoly, the requirement for universal service, and the labour and pension concerns of existing Canada Post employees. Given the existing constraints of labour agreements and political considerations on changing the prices for postal services, incremental reform may be the best approach.

One way to reform Canada Post is to gradually eliminate the government monopoly. This could be done through contracting arrangements, whereby the government auctions the right to operate specific parts of postal services, such as mail delivery and pick up. In such an auction - in which current Canada Post employees could bid for the work - the bidder that offers to accept the lowest payment per unit of mail for delivery or pick up would win the right to provide the service. Canada Post could pay contractors out of revenues from stamp sales or other income streams.

Unlike full privatization, contracting delivery and pick-up services would mean little noticeable change for customers unless the government chose to enforce performance standards different from current practices.

Contracting arrangements for delivery and pick-up services would be a continuation of the existing practice of contracting out the operation of postal outlets, customer care centres, and air and long distance transportation.

The economic merits of maintaining common prices and service levels across Canada are dubious. The cost of service is higher in rural areas than in urban areas, and cross-subsidizing mail services in rural areas results in higher costs for urban customers. Nevertheless, political influences over short-term postal reform make scrapping the notion of universal service unlikely. But rather than imposing the cost of maintaining rural service on other postal customers, government could provide general subsidies, which would be the most efficient and transparent way to meet the policy goal of preserving equal urban and rural prices.

Because maintaining rural services and common service standards, or forbidding outlets from closing, are political objectives, public attention to the costs of these political objectives may help the policy reform process. Direct government subsidization, rather than requiring Canada Post to subsidize loss-making postal services through higher prices for other customers, would be a better approach.

Contracting arrangements would create a strong incentive for contracted employers and their employees to maximize their productivity. Firms with relatively low-productivity employees would either lose contracts or be less profitable than otherwise. Employees, recognizing that labour disruptions, low productivity or excess wage demands could result in their firm losing contracts, likely would perform better than current Canada Post employees.

Gradually introducing contracting arrangements for more Canada Post services could extend to broader reforms and privatization - akin to the process under way at the Royal Mail - once new competitors are in place and the costs of maintaining the existing universal services become clear.

It is time that Canada's postal services caught up with those of the rest of the world, and that Canadians benefited from the most efficient system possible.

Benjamin Dachis is a Senior Policy Analyst at the C.D. Howe Institute. He is the author of the study "How Ottawa Can Deliver a Reformed Canada Post."


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