Montreal, June 15, 2011 • No 290

 

Adam Allouba is a business lawyer based in Montreal and a graduate of the McGill University Faculty of Law. He also holds a B.A. and an M.A. in political science from McGill.
 

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Suppose They Gave a Strike and Nobody Noticed: The Future of Canada Post
 

by Adam Allouba
 

          After failing to reach an agreement with Canada Post, the Canadian Union of Postal Workers (CUPW) began a series of rotating strikes on June 2. As usual, the dispute centers on wages and benefits. While the outcome of this industrial action remains uncertain, it provides a good opportunity to consider Canada Post’s current situation and its future.
 

If it is broke…

          A Canada Post expert from Carleton University reports that the original postal monopoly was created in England in 1635, when Charles I decided it would help him spy on communications while benefiting the public purse. The deposed monarch’s legacy remains with us today in the Canada Post Corporation Act, which, subject to certain exceptions, grants the entity “the sole and exclusive privilege of collecting, transmitting and delivering letters to the addressee thereof within Canada.”

          Over time, that privilege has been eroded. Courier services opened up the high-end market, relying on an exception for “letters of an urgent nature that are transmitted by a messenger.” They cannot compete with regular mail, however, since by law they must charge at least triple Canada Post’s rate for letters weighing 50 grams, currently $1.03.

          Such competition pales, of course, in comparison to the impact of the Internet and electronic commerce on the low end of Canada Post’s business. Catalogues, bills, greeting cards, letters, magazines and any number of documents no longer need to be delivered in physical form. Even as new addresses increase by 200,000 annually (an average jump of about 1.5%), Canada Post’s letter mail volumes have decreased by 17% over the past five years, falling by almost 200 million pieces from 2008 to 2009 alone. Average volume per address dipped 13% between 2005 and 2009, from 377 pieces of mail annually to 334.

          These trends are unlikely to reverse; regular mail revenues dropped for each of the last four years preceding Canada Post’s last annual report in 2009. A promising alternative revenue stream is direct marketing, whose strong growth from 2005 to 2008 brought it from 17% of Canada Post’s revenues to 18.5% (this figure dropped somewhat in 2009 due to the recession). Then again, Canada Post probably does not aspire to being a state-owned junk mail delivery system.

…Then let’s fix it

          Current circumstances are crying out for change. Everything from Canada Post’s cost structure to its very business model merits further scrutiny.

Fix the workforce

          An obvious place to start is Canada Post’s under-producing labour force. In 2005, its average full-time employee missed 16 days of work, 60% more than the average manufacturing employee and 20% more than the average unionized worker. The portion of its employees on modified duties is estimated to be up to five times the industry average. In 2004, Canada Post workers were estimated to have worked less than 64% of their actual paid time, or 10% less than other unionized employees. These numbers come with a price tag: in 2008, 64% of Canada Post’s revenues went to its labour costs. This figure was 15 to 20 percentage points higher than the equivalent figures for Australia, New Zealand, Sweden and Austria. (Only the US Postal Service was significantly higher.)

          As expensive as Canada Post’s labour force is today, it may be an even heavier financial burden tomorrow. Under its current “defined benefit” pension plan, workers receive a pre-determined amount upon retirement. While it is an employee’s dream, it is highly risky for the employer, who must make up the difference if contributions plus return on investment are insufficient to pay the amount owed.

          Defined benefit plans face large shortfalls across the Western world. For example, the pension funds of the London Stock Exchange’s 350 largest corporations face a collective shortfall of £109 billion. An employer that grants its workers a guaranteed benefit upon retirement must be confident that its cash flow will cover any deficiency without soaking up its working capital. Unsurprisingly, 88% of US public-sector workers have hit the defined benefit jackpot. After all, when “management” is short of funds, it simply confiscates them from taxpayers. Conversely, only 32% of American large- and medium-sized employers are willing to bet their businesses on such plans, and for good reason: heavy pension liabilities helped push companies such as Nortel and General Motors Canada into bankruptcy.

          Canada Post’s pension plan reports a deficit of $2 billion to $3.2 billion, depending on how its assets are calculated. Nonetheless, CUPW refuses to countenance any changes, whether for current or future employees – and since Canada Post is publicly-owned, taxpayers will inevitably be on the hook for any shortfall. Then again, as the GM and Nortel bailouts show, maybe “private” pensions are a relic of the past.

          The upshot is that either CUPW makes significant concessions, or taxpayers will probably have to dish out billions to pay for retirement benefits that are, for the most part, more generous than their own. Of course, while management has acknowledged the need to address the problem, being a Crown corporation whose debt has an implicit guarantee from the public purse certainly relieves some of the pressure to find a solution.
 

"There is no universal state-run monopoly for food or shelter, both of which are far more essential to life. Public schools compete with their private counterparts. And nowhere in the industrialized world (besides Canada, in certain situations) is it illegal to buy and sell healthcare on the open market. What makes the mail so special?"


Fix the business model

          Another point to consider is Canada Post’s business model, namely its universal service obligation (USO). The USO exists under the Universal Postal Convention, of which Canada is a member. Under that agreement, member states must “ensure that all users/customers enjoy the right to a universal postal service involving the permanent provision of quality basic postal services at all points in their territory, at affordable prices.”

          The complement of the USO is Canada Post’s status as a Crown corporation with a monopoly on letter mail. A 2008 strategic review panel’s explanation of that link is worth quoting in full:

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

          If that was too subtle, the government explicitly told the panel that Canada Post’s vocation is and would remain social engineering, calling it “an instrument of public policy through the provision of postal services to Canadians.”

          So why should the USO exist at all? The classic answer is that it guarantees all Canadians access to postal service, which even in 2011 remains important for many of us. But does that really make any sense? After all, there is no universal state-run monopoly for food or shelter, both of which are far more essential to life. Public schools compete with their private counterparts. And nowhere in the industrialized world (besides Canada, in certain situations) is it illegal to buy and sell healthcare on the open market. What makes the mail so special?

          Postal routes fall into two categories: profitable and unprofitable. It is impossible to determine with certainty which are which, since Canada Post runs them all and charges one uniform price for all letters. But since it has made a profit for 15 consecutive years, we can infer that the corporation makes a killing on some routes (such as letters mailed and delivered in the same city) that compensates for losses on transporting mail from, say, Paulatuk to Stephenville. This means that many of us pay inflated prices that would be lower were it not for the need to subsidize the unprofitable routes required by the USO.

          International comparisons support this conclusion. A recent study by the Montreal Economic Institute shows that in Austria, the Netherlands and Germany, all of which have privatized their post offices, stamp prices have fallen by up to 17% since reforms began. Even liberalization without privatization can have a positive impact, such as in New Zealand where rates have plunged by 30% since the state gave up its monopoly. Compare that to Canada, where we pay 41% more in real terms for a stamp today than we did in 1981 (when Canada Post ceased to be a government department, becoming a Crown corporation). Both this report and a 2007 analysis by the CD Howe Institute conclude that it is time to end Canada Post’s monopoly, relieve it of the USO and privatize it.

          Such changes would hardly be revolutionary; all European postal monopolies must be abolished by 2013. The alternative model is the unreformed US Postal Service – an agency $15 billion in debt that has been reduced to hiring a “chief marketing sales officer” with the Sisyphean task of convincing Americans to keep mailing paper documents. Incidentally, Canada Post seems to have its own crack public-relations squad that monitors the corporation’s media coverage, ever ready to dash off a letter to the editor in its defence.

          Privatizing Canada Post and ending the USO would probably lower rates and improve service for most Canadians, with one major exception: those in isolated rural communities. Rates in very remote areas would surely rise; some may see their postal services cut dramatically or even eliminated if the cost of servicing them is too high. But to argue that we should therefore preserve the status quo is to argue that such people are entitled to force others to subsidize their personal choices. They have the right to live where they please, but not to seize other people’s property in order to enjoy amenities that they could not otherwise afford.

Spread liberty

          As it stands, the Canada Post Corporation Act provides for imprisonment of up to five years for violating its provisions, including the exclusive privilege. It is an offence even to possess a letter in order to “transmit or deliver it” in defiance of the corporation’s monopoly. Does such a punishment really fit the “crime”? For that matter, should an economic operation such as Canada Post benefit from the threat of imprisonment for anyone who, for example, evades payment of postage? The best reason to reform Canada Post is not to reduce costs, nor is it to increase efficiency. As laudable as these goals are, the best reason to reform Canada Post is simply to advance the cause of freedom.