Will subsidy or sales save the USO?

A little experiment shows that it wouldn’t take as much revenue as you might think to preserve the USO, but it’s also going to take some “bail out”, whether we like it or not. In the August 2009 issue of Mail & Express Review I laid out some reasons why USO, the Universal Service Obligation, was just that – an obligation, and one that the postal world was going to have to live up to one way or another. No matter which way you look at it, it’s a “social contract”. But obviously not everyone agrees.

Earlier this year at Triangle’s Pan-American conference in Miami we heard a variety of views on the subject. Following are some quotes from a spirited session: “The USO is outdated; as a worldwide UPU concept it should be done away with.” Quoting Adam Smith, the same delegate went on to say, “we should only be guided by the invisible hand of the market.” Another asked, “Why is mail delivery a right, when other services such as water and sewage are not?”

There were supporters of USO, of course. “Trying to reach the most remote regions is not profitable, but we have an obligation,” said one delegate from South America. While another said, “We need national coverage without limitation, but we need to integrate the private operators.”  And in response to that, a delegate reminded the group, “the private sector only goes where there is a demand.” Let’s take a minute to dissect these comments.

The delegate quoting Adam Smith and his famous “invisible hand” statement seems to be saying that postal services are sold, not bought. That implies that the postal sector went out and created demand! Last I knew, postal services were developed to establish communications between citizens, not as a product to be huckstered on TV. Obviously, marketing plays a role in the design and positioning of services and products, but those are ancillary to the core obligation of providing a trusted and confidential link between “me and thee.” Leaving it to the entrepreneurs will not hack it.

The observation that we need to integrate the private operators is more on target. And of course this is already happening, though with mixed success. It is sobering when you hear that after a decade of experimentation, Argentina has reverted back to a publicly held institution. Germany is making better progress, though not without considerable stress. Sweden is a true success story, but in the UK the jury is still out. And in the US, the private sector probably got the better part of the deal when Fed Ex and UPS contracted with the USPS to airfreight mail and parcels.  But so far there is no talk of the private sector delivering the last mile. In fact, the reverse has happened.  Realizing that the USPS was happy to continue bearing the frightful expense of serving every delivery point, the express companies now unload at the retail outlets. Whatever works!

The point made by one delegate comparing postal services to water and sewage services has come up before. I guess the point is that as we don’t get subsidised universal service for water and sewage, why should we get it for our postal delivery. It’s a poor analogy. Yes, we pay for basic municipal services through the tax rate, and we pay for postal services through the postage rate. If I don’t pay my water bill, my service is cut off. If I don’t put a stamp on the envelope, the letter doesn’t get delivered. But that’s where the analogy ends. Municipal systems only serve customers concentrated in high-density areas; millions of others use private systems. The post, however, must reach every delivery point, irrespective of density and distance. And with falling postal revenues this is becoming a burdensome task. So what to do?

Obviously the posts must do everything they can to cut costs and increase revenues. But in view of the immense migration of daily communications to electronic media, attempts at increasing postal revenues are chimerical at best. The only answer lies in cost cutting and – dreaded word – subsidy.

Where the posts cannot make ends meet, and privatisation (full or partial) is not the answer, which only leaves subsidy. Examples of national subsidies abound in many countries – count the ways! Interestingly, except for agriculture, most subsidies involve communication or transportation – services vital to the national interests. Certainly the postal service falls within that description. So the question then is what kind of subsidy? Cash bail out? Annual appropriations?  Or perhaps a levy on the user such as a tax or service fee?  I don’t know, but I carried out one interesting exercise related to the USPS’s plight.

According to the USPS records, as of 2008 there were 149.2m delivery points in the US. Delivery points increase every year along with the population, so rounding up to 150m I asked myself what the impact would be if one person at each delivery point (household or business) bought just one additional book of 100 stamps this year. In the US a first class stamp is 44 cents. The startling answer is $6.6bn – twice what is required to wipe out the projected loss for fiscal 2009. In the UK, a similar exercise would produce £1.09bn. Mounting a marketing campaign to seek these goals would be difficult if not impossible. But the math points out what a relatively small customer initiative stands between profit and loss for the posts. The answer may lie in a combination of marketing and subsidy to preserve the universal service obligation.