Australia Post: Let's free it up

Bookmark and Share Economics & Deregulation | Mikayla Novak
Canberra Times 29th June, 2014

Substantial reform of Australia Post is urgently required for it to most effectively manage the radical transformations unfolding within the postal communications sector. As evidenced in many other parts of the Australian economy, technological developments and changing consumer tastes are blowing the winds of Schumpeterian ''creative destruction'' right through the processes of delivering letters and parcels.

The most obvious innovation has been the widespread adoption of email, enabling people to contact others on a personal or professional basis instantaneously. There has also been a boom in parcel deliveries due to the emergence of national and international shopping online.

The growth in parcel traffic catalysed by online shopping has been aided by moves among couriers to streamline global supply chains and, through it, improve delivery times and reduce prices, and even Amazon is testing out the use of drones for same-day parcel deliveries.

The volume of physical mail delivered by Australia Post has been in decline over recent years, due to the near-saturated uptake in electronic communications. Australia Post handled less than five billion items of mail in the last financial year, equivalent to one billion fewer letters being delivered each year compared with 2008. At the same time, Australia Post services 11.2 million addresses, with this number increasing by about 130,000 each year due mainly to population growth.

Primarily as a consequence of online shopping growth, the numbers of domestically delivered parcels by Australia Post has grown by a little over 9 per cent in 2012-13. Overall, Australia Post attained an after-tax profit last financial year.

Last week the government released the findings of a consultancy study suggesting that the overall financial position of Australia Post is approaching the crossroads. Against the backdrop of declining letter traffic, as a result of the government's commitment to go online with all public correspondence from 2017, and more vigorous competition from private parcel couriers, it is projected that overall profitability will soon end.

Australia Post has responded to its financial predicament in several ways, including job cuts, a two-tiered pricing system for business mail, and a structural separation of the letter and retail business from parcels.

It is true that the modern Australia Post has a greater degree of discretion to amend its operating practices, thanks to the 'corporatisation' model ushered in by the Hawke government in 1989 that obliges the organisation to conduct itself in a 'business-like' fashion. But it is unclear that there is compelling merit to keep restraining the postal service within the straitjackets of the 'community service obligation' and state ownership.

The prevailing CSO allows Australia Post to maintain a legal monopoly over domestic and international letters weighing less than 250 grams, but with several service delivery obligations to be maintained. These include postage to be charged anywhere within Australia at a standard rate, deliveries made to 98 per cent of addresses five time per week, and the maintaining of at least 4000 retail outlets (including 2500 in rural and remote areas).

The CSO conditions not only impose a continuing cost burden upon the postal monopoly, but the regulations prevent potential alternative suppliers in the market from discovering which elements of the letters and small parcels business are profitable, if at all, and thus worth maintaining.

Good steps forward for a reforming government would be to break the Australia Post letter monopoly, relax the CSO provisions, and, if services delivery to regional Australia remains a concern, then directly subsidise the cost of letter deliveries, through the budget, in the form of transparent spending measures.

Postal sector liberalisation has become commonplace throughout the Western world over the last three decades, with European Union countries and New Zealand among the most notable abolishing the postal monopoly, opening up letter and parcel carriage to new entrants, and relaxing service regulatory standards. The Commonwealth should also consider transferring Australia Post out of public sector ownership in an act of privatisation, as suggested by the Shepherd National Commission of Audit released earlier this year.

Late last year the British government sold 60 per cent of its stake in the nearly 500-year-old Royal Mail, at 330 pence per share, raising almost £2 billion ($3.615 billion) in sales proceeds. The Royal Mail sale proceeded smoothly, and the initial public share offering was massively oversubscribed, but critics have lambasted the sale claiming the Cameron government sold Royal Mail 'on the cheap,' given that shares closed 38 per cent higher than the sale price on the first day of trading alone.

Such criticisms appear disingenuous to the extent they are primarily waged by anti-privatisation proponents, who condemn privatisation on account of its ability to reap government revenues from asset sales, in any case. In any case, absent a pre-existing domestic market for postal services, it is nigh on impossible to establish the 'correct' or 'ideal' share price that should be set for an initial public float of a longstanding state-owned entity.

Rather than setting the share price too high, and risking the potential for insufficient share market interest, the Cameron government wisely proceeded more cautiously and, so, can take any lessons from the initial sale in any future partial, or completed, sale of Royal Mail.

But the ultimate end of privatisation is not to fill the public treasury with more cash, but allow consumers to enjoy cheaper and better quality services that can only come from a competitive postal sector with the greatest incentive to become more cost-efficient and market-responsive.

In the end, the best way to set sail to the winds of structural change is to free up Australia Post, and allow the market to discover what postal products and services customers would most prefer.