Submission by FedEx Canada on Canada Post’s mandate review

The central focus of the mandate review of Canada Post Corporation ("Canada Post") should be to question the policy rationale for the federal government's continued presence in highly competitive markets, including courier markets. This presence is contrary to the fundamental policy of the current government as articulated by the Finance Minister in the 1995 Budget Plan.

Federal Express Canada Ltd. ("FedEx") questions why taxpayers should continue to fund Canada Post's activities in highly competitive markets, including the substantial future investments that will be required to remain competitive in those markets. FedEx's concerns, which are shared by a broad range of other stakeholders, are considerably exacerbated by Canada Post's ability to exploit advantages enjoyed by virtue of its public sector status. These include the serious potential, in the absence of regulation and independent oversight, to use monopoly revenues from its statutory monopoly in first class letter mail to cross-subsidize operations in competitive markets. This has created a widespread perception of unfair competition and threatens jobs, as some private sector firms are forced to scale back their operations to reduce costs in an effort to remain competitive. It may be noted that the perception of unfair competition was a key reason underlying the government's privatization of many of the functions of Canada Communication Group ("CCG") last year. In addition, this perception has been at the root of numerous reviews of Canada Post's activities since its creation as a Crown Corporation in 1982. Unfortunately, Canada Post has persistently impeded efforts by government bodies and others to obtain sufficient information regarding its accounting practices to determine whether it is engaging in cross-subsidization.

The lack of an effective mechanism to prevent cross-subsidization is a very important issue to FedEx and other industry stakeholders. Cross-subsidization of competitive activities with revenues from Canada Post's letter mail monopoly not only creates an immensely unfair situation for private sector competitors, but also significantly undermines their ability to compete and forces the general public to pay far more than it should for basic letter mail service. Canada Post's own books, together with statements that have been made by its Chairman, strongly suggest that it engages in cross-subsidization. In any event, the issue is not whether Canada Post may benevolently refrain from cross-subsidizing its competitive activities, but whether it has the ability and incentive to do so when it chooses. It may be noted that this issue raises a serious question under Article 1502(3)(d) of the North American Free Trade Agreement ("NAFTA"), which requires Canada, the U.S. and Mexico to ensure that government monopolies do not use their position to engage in anticompetitive practices, including cross-subsidization.

In the U.K. and the U.S., where this issue has also attained a high profile, the national post office has been subjected to much stricter standards, yet questions continue to be raised as to their adequacy. The result has been that calls continue to be made for the privatization of certain activities carried on by the national post office in each country.
Canada Post has enormous advantages not available to its competitors. These include an ability to borrow at the Government of Canada's preferred rate, immunity from provincial regulations and licensing requirements, special treatment by Customs Canada, exemption from federal income tax requirements and the fact that it is shielded from public scrutiny by extraordinarily weak financial reporting requirements which permit Canada Post to hide inefficiencies and losses under the guise of advancing an undefined and questionable "social purpose". All of the foregoing advantages further aggravate the unfairness of the situation for FedEx and other industry stakeholders.

Canada Post's ownership of Purolator Courier Ltd. ("Purolator") has already resulted in two lengthy investigations by the Bureau of Competition Policy (the "Bureau"), at considerable expense to the taxpayer. These investigations, which are unlikely to be the last, were constrained by the limited scope of the statutory mandate of the Director of Investigation and Research (the "Director") under the Competition Act (the "Act"). In the Purolator matter, which gave rise to widespread public opposition, significant weight appears to have been given to the fact that an independent auditor verified Canada Post's costing methodology and accounting procedures. It may be noted that reliance on such an audit was inconsistent with the position taken by the Director in a long line of previous cases.

One has to question why tax dollars must continue to be spent on investigations and special reviews of Canada Post when there is a straightforward solution to the widely perceived problem – privatization of Canada Post's competitive activities. We submit that if Canada Post is assessed against the six Program Review criteria identified in the federal government's 1995 Budget Plan, the review committee should conclude that Canada Post's courier and other competitive businesses should be privatized.

Given that privatization could take a significant period of time, we submit that the minimum action required in the short term, as a transitory first phase, to address the cross-subsidization issue is a structural separation of Canada Post's monopoly and competitive businesses, together with a number of complementary requirements (described in Part IX of this submission) to ensure that such separation is in fact maintained. This is consistent with the position that has been taken by the CRTC as well as by the Director in a number of cases. Although Canada Post provided a commitment to the Director "to maintain Purolator as a separate corporation … until at least December 31, 1996", the obvious question which arises is what is going to happen after that date. To ensure that the structural separation described above does not continue indefinitely, we suggest that the review committee should recommend that the situation be revisited within a 2-3 year time-frame, for an assessment of the feasibility of proceeding with the second phase of the structural separation process – full privatization of Canada Post's competitive activities.