Updated: June 25, 2010 (Initial publication: June 3, 2010)
Bibliographic Reports : Grey Litterature
III-2.6: On May 28, 2010, the ARCEP (French postal and telecommunications regulatory authority) publishes a report it commissioned from WIK Consult, detailing methods for evaluating intangible benefits that accrue to La Poste (the French postal service) from its universal service obligations
On May 28, 2010, the {Autorité de régulation des communications électroniques et des postes} (ARCEP — French postal and telecommunications regulatory authority) published a report it ordered from WIK Consult, which details the tangible and intangible benefits accruing to {La Poste} (The French postal service) as a result of its universal service obligation, which are to be included in calculating compensation provided to the universal service provider for its universal service obligations, in application of the European Union’s Third Postal Directive liberalizing the postal market in the European Union. This report is critical in tone, but {La Poste} takes issue with its methodology and conclusions.
Attached documents
http://www.arcep.fr/uploads/tx_gspublication/etude-wik-su-postal-mai2010-eng.pdf
Pursuant to European Union Directive 2008/6/EC (The Third Postal Directive), the current monopoly granted to La Poste (the French Postal Service) on delivery of letters weighing less than 50 grams (1,76 ounces), will be abolished by the end of 2010.
Compensation for costs related to La Poste’s Universal Service Obligations (USO) will be granted by either public funds or a compensation fund financed by contributions of postal operators and/or users of postal services.[1]
The compensation shall be equal to the net cost of the USO, taking into account “any intangible and market benefits,” and only if this cost represents an “unfair financial burden on the universal service provider(s)”.[2]
In order to calculate the compensation, “net cost must evaluate benefits, including intangible benefits…for the universal service provider”[3], and subtract the amount of these benefits from the compensation to be provided to the universal service provider for its USO.
Since the European Directive makes reference to intangible benefits, the Autorité de régulation des postes et des communications électroniques (ARCEP — French Telecommunications and Postal Regulatory Authority) commissioned Wik Consulting to perform an analysis of such benefits from which La Poste might benefit, given its status as universal service provider in France.[4]
The report produced used the following methodology to identify intangible benefits that might accrue to La Poste as universal service provider: it conducted a review of relevant research, and a written survey of 6 European postal operators, followed by a telephone interview.
The report concluded that: “a benefit is classified as ‘intangible’ when a universal service provider’s performance and cost accounting, and its calculation of the net cost of the universal service obligation, does not (fully) reflect the impact on revenues and cost that result from the existence of this benefit”.[5]
Furthermore, a benefit is related to the USO if it is “caused by the additional level of service…that La Poste provides only because of the USO, but would not provide otherwise”, or if it “results from a legal right or privilege that is legally related to the provision of universal service, or justified by the USO”.[6]
The intangible benefits related to the USO were identified as:
1. Economies of scale/scope
a. La Poste would likely reduce delivery days and close post offices in remote areas with ‘high unit cost of delivery’, if it were not for the USO.
b. Therefore, La Poste would experience a decline in revenue from less items posted, and would lose economies of scale/scope that result from the highest possible volume of mail sorted and delivered.
c. However, the authors of the report believe that La Poste’s accounting methods and performance indicators are currently incapable of reflecting changes that would occur without the USO.
2. Enhancement of corporate reputation and brand value
a. La Poste is ubiquitous, enjoys a high-level of customer satisfaction and benefits from a positive reputation as a good corporate citizen. As an aspect of France’s cherished service public, La Poste is perceived positively by the population.
b. Reductions that would occur in the absence of USO would probably lead to a decline in La Poste’s reputation, and would affect sales of both USO and non-USO products.
c. Again, the authors of the report believe that La Poste’s performance and accounting methods are not capable of estimating the impact of a reduced service level and possibly bad publicity on demand for postal and other services, which constitutes an intangible benefit.
3. Enhanced advertising effect
a. This is due to La Poste’s nationwide presence and visibility via post offices, letterboxes, and postal vehicles and workers that deliver mail 6 days a week.
b. Without the USO, La Poste would probably reduce post offices, so it would be less visible.
c. The authors believe that La Poste’s accounting and performance accounts do not take this factor into account, making it an intangible benefit.
4. Better bargaining position
a. La Poste is fully owned by the State, which leads to close relationships to local and national politicians. La Poste is also one of France’s largest employers, with more than half of employees still under the status of civil servant, and most of them unionized. La Poste therefore has an advantageous lobbying position.
b. This benefit cannot be accounted for using accounting principles, and is therefore an intangible benefit. However, only part of this is related to the USO, the other part is due to the fact that La Poste is owned by the state, and that it is a large enterprise.
5. Privileged access to the philately market
a. La Poste is the sole authorized printer of French postal stamps, using the Universal Postal Union’s standard country mark of ‘France’. Such stamps are the only ‘true’ postal stamps recognized by stamp collectors.
b. Without the USO, La Poste would not be authorized to issue official postage stamps, which would result in less demand by philatelists.
c. This is an intangible benefit, not accounted for in La Poste’s accounting.
6. VAT Exemption
a. La Poste is exempt from France’s Value Added Tax (VAT) tax, whose standard rate is 19.6%.
b. This gives La Poste a competitive advantage with customers that are not allowed to deduct VAT from their purchases, such as private customers, the public sector, and banking and insurance services (because such companies are also exempt from VAT).
c. However, companies (such as La Poste) that are exempted from VAT pay an extra tax on wages, which partially offsets this benefit. About 86% of La Poste’s income is VAT-exempt.
d. The analysis of the extent of this benefit includes calculating the amount of La Poste’s income subject to VAT; the share of postal revenue from VAT-exempt clients; effects resulting from gross price increases; and the extent to which La Poste can carry VAT over to its customers.
e. In any case, the authors believe that La Poste’s performance and cost accounts do not provide sufficient information to calculate the effect of VAT exemption.
7. Exemptions from customs and excise regulations
a. Article L6-1 of the Code des Postes et des communications électroniques (French Postal and Telecommunications Code) provides La Poste with a simplified and free procedure for submitting international-bound parcels and packages to customs inspection, as specified by Universal Postal Union regulations and treaties.
b. Other postal operators do not benefit from this simplified procedure.
c. La Poste’s performance and accounting methods do not account for this benefit, which makes it intangible.
8. Exemption from transport license
a. La Poste, according to Article 17§8 of French Decree n° 99-752, La Poste is legally exempt from transport licenses, whereby transport companies have to deposit a sum of money with the government (minimum 900 Euros per vehicle) to obtain a transport license. These sums are therefore unavailable for equity and debt requirements, and the corporations require extra capital to meet their current and investment expenses. La Poste being exempt from this requirement, it benefits from a competitive advantage.
b. This competitive advantage is not accounted for in La Poste’s performance and cost accounts.
The report also includes an analysis of tangible benefits related to the USO. Tangible benefits are included in La Poste’s cost and performance analysis, and can be directly related to La Poste’s status as universal service provider.
Such tangible benefits are:
1. Demand complementarities
a. La Poste has 2.7 post offices per 10,000 inhabitants, which provide, besides postal services, sale of stationery and financial services through La Banque Postale (The Postal Bank). Without the USO, La Poste would probably reduce the number of post offices, and would therefore lose revenue from other services it provides.
b. Such benefits are apparent from La Poste’s accounting[7], and will therefore be automatically considered in estimating the net cost calculation the ARCEP will receive.
2. Press subsidies
a. According to subsection B of section 2 of Article R1 of French Decree n°2007-29 of January 5 2007 relating to Service universal postal et aux droits et obligations de La Poste… [Universal postal service and the rights and obligations of La Poste], the delivery of newspapers and periodicals is included in the universal service obligation. Articles L.4 and R.1-1-17 of the Code des postes et des communications électroniques [French Postal and Telecommunications Code] oblige La Poste to promote diversity of the printed press.
In order to achieve this goal, La Poste is granted a financial compensation determined by a tripartite agreement signed by La Poste, the French State, and publishers’ representatives.[8] According to this agreement, La Poste receives 242 million Euros per year, which is supposed to be gradually reduced to the sum of 180 million Euros by 2015.
If La Poste were to reduce delivery frequency, it would probably violate the aforementioned decree and provisions of the Code des postes, which would result in the loss of this subsidy.
b. This benefit is tangible, because it is included in La Poste’s accounting.
Finally, the report takes into account other commercial benefits that are not related to the USO, but relate to La Poste’s unique historical and cultural position as sole postal operator in France for centuries. Such advantages would exist even without the USO, and are included in the report in order to help the ARCEP assess their impact on La Poste’s market position and costs. Such benefits are not mentioned specifically in the European directive, but could eventually be used by the ARCEP in asymmetrical regulation, and include:
1. La Poste’s market-dominant position: La Poste dominates the French postal market, since competition for letters has not yet emerged. According to the report, even in countries where the postal market has been opened to competition, the historical operator remains dominant. This is because of consumer inertia (the price of a stamp is not significant enough for households to seek out competitors), and the fact that the actual cost of sorting and delivering letters is higher than the price of the stamp. Therefore, competition is only truly effective for large-volume senders, who can benefit from significant savings by using competition to their advantage. However, this advantage is not related to the USO, because without it La Poste would have more freedom in setting prices and in protecting its market share; nonetheless, it is doubtlessly a circumstance to La Poste’s advantage.
2. Strategic advantages in prices and acquisition: La Poste’s size might allow it to acquire competitors (it has already acquired a number of foreign parcel carriers). La Poste’s volume of delivery (280 letters per capita per annum according to the report) allows it to provide lower prices through better economies of scale and a larger offer of services than its competitors. However, this is not related to the USO, but rather to La Poste’s structural factors such as its size and historical monopoly.
3. Detailed knowledge of the market: Since La Poste has never had any competitors, it naturally has the best knowledge of the market, and because of its monopoly, it already has a relationship with all potential customers on the market. This is a factor that would exist with or without the USO.
4. Interest profit due to prepaid postage: La Poste, just as all traditional postal services, sells stamps in advance of letters actually being sent. This allows La Poste to be less dependent on third parties for credit, or to benefit from investment income in the form of interest. Even though all competitors could apply the same system of prepaid postage, La Poste’s natural size means that it will probably benefit from a more powerful position (more stamps sold) than its competitors.
5. Ownership of post office boxes: La Poste owns post office boxes and manages the Cedex[9] system. Delivering mail to post office boxes is less costly than direct delivery, because there is less transport necessary. This allows La Poste to save money compared to competitors, and possibly to create complementary demand, by selling other goods and services to customers who come to the post office to pick up their mail. It is improbable that a competitor would develop a parallel system, because of the investment needed, and the unattractiveness for consumers of having multiple post office boxes. Even though post office box service is not part of the USO, it is a pre-existing factor that benefits La Poste.
6. Postal code system: La Poste created and manages the French postal code system to conform to its own, internal logistical structure for mail flow and delivery. Furthermore, since the system has existed since the 1970’s, consumers are familiar with it. This means that competitors will have to use La Poste’s postcode system, even if it does not comply with their internal logistical structure. This gives La Poste a competitive advantage, and could create extra costs for competitors. This is not related to the USO, but rather, to the historical monopoly.
7. Free parking permits: French towns allow La Poste’s vehicles to use public street parking for free. However, they do not grant the same privilege to other parcel delivery companies, who have to look for an appropriate parking space and pay the parking fee, or else, face a parking fine. If this situation does not change, it will represent a competitive advantage for La Poste. The report makes the suggestion that even if La Poste were to lose its parking privileges, agents would probably fine La Poste vehicles less often than other vehicles, out of habit.
8. Tax deductions: In addition to its USO, La Poste is legally required to contribute to national and regional development programs to benefit underdeveloped areas of France. It therefore receives a tax deduction on local taxes on land and buildings to compensate it for maintaining postal presence in rural areas. The amount of this deduction is currently equal to 140 million Euros per year. This is not related to the USO, even though La Poste would likely lose this deduction if it were not designated universal service provider.
9. Privileged access to terminal dues paid by foreign postal operators: Terminal dues are the system by which postal operators compensates their counterparts in a foreign country for delivering mail they send to that country. These dues are defined by the Universal Postal Union’s Convention on Postal Dues[10], and the REIMS convention between European Union postal operators[11]. Even though access to UPU negotiations and system is closed to other postal operators, La Poste’s competitors should theoretically be allowed to negotiate and participate in the REIMS convention. Therefore, despite La Poste’s advantage in negotiations due to its size, volume, and status of universal service provider, this advantage is not directly linked to the USO.
[1] Editor’s note: Cf. Regulatory Law Review, 2010, II-2.1
[2] Directive 2008/6/EC Annex I, Part B, and Article 7
[3] Idem, Annex 1, Part B.
[4] ARCEP, Definition, classification, and methodology for evaluating intangible benefits related to universal postal service, commissioned from WIK Consult, published May 28, 2010, available at www.arcep.fr in both French and English.
[5] ARCEP, p.23
[6] Idem, pp. 23-24
[7] Cf European Commission State Aid Decision n°531/2005 on the creation of La banque postale (The Postal Bank), for an example of La Poste’s model for estimating the impact on demand in case of closures of postal outlets.
[8] Accord tripartite 2009-2015
[9] Courrier d’entreprise à distribution exceptionnelle [Special delivery business mail], a system of special delivery to businesses that receive large volumes of mail: the system works by attributing a special postal code to each ‘Cedex’ business, which then receives its mail through a special delivery channel, rather than via general delivery to households and smaller businesses.
[10] 2010-2013 dues Schedule available on the Universal Postal Union’s website : http://www.upu.int/en/activities/terminal-dues-and-transit-charges/2010-2013-cycle.html
[11] Available at : http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:1998:053:0003:0006:EN:PDF
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