Create a level playing field

Postal services have a long history that cannot be disregarded. The state monopolist has advantages and disadvantages compared to new entrants. Itself, it prefers to underline the burden of the USO, which can be explicitly stated in the law but additionally implicit expectations on it from the public to provide certain services. Obstacles may be present to management’s intentions to reform the organisation for reasons of politics, culture or union’s resistance when it gets exposed to competition. On the other hand, the state monopolist is not only running business, often it owns or controls the postal infrastructure and is simultaneously the regulator of the market itself.⁸⁸ It has one of the most well known trademarks and the advantage of serving the whole country with all products.

Regulation cannot do away with this background and start a market from scratch. Given the historical background and the economic conditions, there are certain lessons from Sweden that can be applied generally in order to stimulate efficiency without distortions and unwarranted restrictions.

Thesame level of VAT and other taxes

In Sweden, there was no VAT on the postage for historical reasons: government authorities and businesses were normally exempted from charging VAT. When Sweden Post turned into a public company in 1994, it was natural to introduce a VAT, in particular as Sweden carried out major tax reforms in the early 1990s.⁸⁹

This reform is the most important and technically easiest to implement. The crucial issue is to have the same VAT level for the state former monopolist and new private entrants. Otherwise, insurmountable barriers to entry will prevail. Whether the level should be zero or the same as for other products is rather a question for tax policy than for postal policy. A zero level implicitly means that postal services are subsidised. If politicians decide that this should be the case, it is fully acceptable as long as also private operators are exempted from charging VAT. Then, there must be a justification why there is no VAT on stamps, if not on similar products like telephone calls, railway tickets or newspapers. Indeed, liberalisation brings the issue of VAT on the agenda, but it is an incorrect conclusion that liberalisation is harmful to households (cf. section 5.3) because it inevitably leads to price increases. If the state believes that postal services should be supported, VAT can be zero or low with as well as without liberalisation.

It is equally important that the state firm do not keep or obtain any other tax advantages compared to new private firms. This covers all kinds of taxes like on fuel for transportation, profit tax or pension benefits. Sweden has not experienced any other such tax problems, but they may exist in other countries depending on the current type of regulation of public enterprises.

88 Recall that in Sweden, despite that Sweden Post Office did not defend the monopoly as such, it had to report City Mail’s entry in 1991 to the public prosecutor.

89 Some products in Sweden have from time to time had a lower VAT than the general 25%. To mitigate the effect of VAT on the postage, it was 12% from 1994 to 1996 when it was raised to 25%: Later, the EU has criticised Sweden for its high VAT on the postage. Introducing VAT on the postage in Sweden was never under any heated political debate.

Equal access to the postal infrastructure

In most deregulated markets, there is a certain physical and immaterial infrastructure that is controlled by the former monopolist and regulatory reform must ensure that new entrants gain equal access to such facilities. Such issues can in principle be solved through regulation, through voluntary agreements between operators or between an operator and a third party.

When volumes are fairly equal, operators have mutual incentives to cooperate on such issues, but at least initially with a dominant operator, regulation is required. A successful solution was when it was decided already in 1993 that incorrectly addressed mail should not any more be a responsibility of the Post Office; it is now handled by a special unit of PTS. For regional employment reasons, it was located in Kiruna in the very north of Sweden.

There were other substantial operational problems in the early years of postal deregulation before the reform in 1999 and some voluntary agreements between the parties. They have concerned the control of the post code system, new entrants’ access to door codes and mailboxes in flats, the right to put letter boxes along the streets, handling of and payment for forwarding of mail given to the wrong operator and access to central address files. The experience is that the incumbent created unwarranted obstacles for new entrants; a fairly natural response particularly after being used to having monopoly for a long time.

In Sweden, the control of the postcode system is now regulated, although it is still in the control of Sweden Post but with limitations and restrictions. After some years of conflicts, the operators have managed to find solutions to mail given to the wrong operator and created a common address file company. To ensure access to mailboxes in flats’ entrances is up to new operators and time and money for getting access represents an investment cost that is sunk.

Depending on the willingness to negotiate, other regulatory solutions can be necessary in other countries, and a regulator should monitor such issues closely in order not to discourage entry immediately after deregulation. The lesson to be learned is that such issue be solved before liberalisation is completed.

Upstream and downstream access to the network of the USO-provider

It is up to the commercial decisions of the operators to offer upstream access to its network for clients. Upstream access has never been regulated in Sweden. When City Mail entered in 1991, the Post Office had no discount for pre-sorted mail. As a consequence of entry and the response by the incumbent, access for customers with pre-sorted bulk mail has been available since. This is not unique for Sweden. Also in some non-liberalised countries, the monopolists offer discounts for pre-sorted bulk mail. In the still heavily regulated postal market in the United States, worksharing was introduced early.

The role of access to the USP’s network is different for postal operators than for customers.

Few new entrants can offer nationwide delivery from the start. Like for example telephone companies transfer calls to other operators, it should be possible to forward mail likewise.

New operators in Sweden can always pay Sweden Post the regular postage for such mail.

Then, however, they will make a loss on each letter. If they carry out the first steps in the production process, they should get a non-discriminatory price from Sweden Post that

represents the cost savings for the larger firm.⁹⁰ In order to deter entry, the incumbent can charge a too high price for such access.

Until today, the only regulated access in Sweden is for delivery to the post office boxes of Sweden Post. New operators get mail addressed to PO boxes. Both the terms of handling and the price were subject to conflicts during the first years. After decisions from the Competition Authority and amendments to the Postal Act in 1999, Sweden Post receives this mail with a price corresponding to its own cost savings. Standard contracts have been introduced to regulate the specific conditions for handing over this mail.

Partly the Competition Act handles access conditions because dominant firms must provide access on equal and non-discriminatory terms. However, competition law has turned out to be weak and slow because abuses are usually not decided upon in the highest Court of Instance until several years later when a new entrant can already have been forced to exit. Sector-specific regulation has stronger power. Thus, the Government Commission in 2005 proposed that access regulation be introduced in the Postal Act in a similar way, as is already the case for telephone services.

Transitory price regulation only for single piece mail

Price regulation in the form of a price cap has been used in Sweden since the early 1990s. It may be a solution in the first years after deregulation in order to limit the possibilities for the incumbent to raise prices on non-competitive segments. It is difficult to design price

regulation in an optimal way and in the long run it may cause regulatory failures. For example in Sweden, the 20g letter is now found to be underpriced (PTS 2002). In itself, this would be an abuse of a dominant position if not a result of sector-specific regulation. It may thus constitute a barrier to entry. As the 20g letter is the base product of postal services, underpricing of it (cross-subsidised by heavier letters) can be counter-productive as it will deter entry of new firms in the single piece market.

As a consequence, the Government Commission in 2005 proposed the abolishment of the price cap, because competition enhanced by access regulation will be a more effective solution when the opened market has matured like in Sweden. The Commission shows that household’s expenses on stamps are very small, just above 200 SEK/year on average.

However, PTS together with Glesbygdsverket rejected this proposal. Their justification was that it could harm consumers as well as increase the opportunity for Sweden Post to increase the postage on single-piece mail and cross subsidise bulk mail and drive City Mail from the market. No decision has been taken on this issue by the parliament as of September 2006.

The price-cap and the uniform price in Sweden have never covered bulk mail. As a consequence, the bulk mail market is the most matured where the effects of competition are most significant. Upstream access, price adjustments, individual contracts and introduction of some innovative services have taken place, as was shown in chapter 5.

The right to compete by means of price was a contested issue around 1996 when City Mail re-entered the market and expanded outside of Stockholm to the second and third largest towns

90 Advances in technology may in fact hinder such access. Mail is processed already in the early stages of production, for example bar codes are attached and sorting is carried out down to the order of delivery. Thus, the possibility for other operators to prepare mail is reduced.

in Sweden.⁹¹ Sweden Post responded by suggesting zonal pricing consisting of four zones:

one for central Stockholm, a second for the second and third largest town, a third for another 16 large towns and the fourth zone for the rest of Sweden. The justification was a

combination of alleged lower delivery costs in these areas and an additional competitive margin. When the Competition Authority in a preliminary decision refused Sweden Post to implement this price schedule, a new two-zone price list with one price for all the 19 largest towns and another for the rest of the country was suggested. The Competition Authority also refused this list. Two years later, after both Sweden Post and the Competition Authority had appealed the decisions and many lawyers had been involved in the case, the two-zone price list was allowed by the highest instance, the Market Court. It found the first four-zone price list an abuse of dominant position because it was found that Sweden Post had had the intent to drive City Mail out of the market. The proof was the time of introduction and statements in business plans of Sweden Post that it would aggressively meet competition. The second price list was accepted, because Sweden Post was able to prove cost differences between the two geographical areas. It illustrates the principles discussed in chapter 3. A dominant firm is always allowed to price at stand alone cost but should be able to lower prices down to average incremental cost if it does not have the intent to drive its competitor out of the market.

However, in 1996, Sweden Post accounting system was not designed to show geographical differences in delivery costs and also later, its calculations have been contested. With a large share of joint costs, it is difficult to prove to competition authorities when prices are above the relevant costs. A conclusion from Swedish experience that fits with PWC (2006) is that fair non-uniform zone prices for bulk mail stimulate efficiency and competition.

The optimal design of regulation in order to create a level playing field is difficult. An equal VAT level, equal access to essential facilities and access to the USO-provider’s network on non-discriminatory terms are the most crucial factors. The precise design has to take into account country specific economic conditions and postal policy goals. After more than 10 years some reforms remains to be carried out in Sweden.

USO is compatible with market opening in many countries

As was discussed in chapter 6, Swedish experience shows that USO can continue to be provided even after more than ten years of liberalisation in a large and sparsely populated country with declining demand. The evidence from Sweden supports several studies of the USO, that the financial burden is relatively small, even if country-specific factors are important.

There is no calculation in Sweden of USO costs. Already before liberalisation, Sweden Post Office claimed that it would be able to provide USO without a legal monopoly. It has been able to do so profitably, even if it hints that declining demand may jeopardise the possibility in the future. Thus, the empirical evidence is overwhelming that – even if there is a financial burden – under current circumstances the benefit of being able to serve all addressees in the country outweighs the costs. Competition has enhanced the provision of USO by stimulating the productivity of Sweden Post as well as eroded some profits.

If the USO is further eroded, it is not because of liberalisation, but due to declining demand that reduces the scale economies. In that case, a return to legal monopoly in Sweden is highly unlikely. There are two alternative solutions. A compensation fund was discussed already in

91 See Andersson (2001, ch 7) for a complete analysis of the legal issues.

the 1990s but never implemented because of the small contributions required at that time.

Such a fund is the first alternative and it would also follow the principle in Sweden that each communications sector should finance its demand internally.⁹² The second alternative is public finance through subsidies from the state budget. It is a question for politics and not postal policy whether it is the postal consumers alone or the collective of taxpayers who should pay for non-commercial services, foremost delivery in remote areas. Through a system of tendering, such subsidy may in fact stimulate competition. If, for example, Sweden Post finds that the delivery routes in certain regions are unprofitable, the state offers the

opportunity to any firm that is willing to deliver for the lowest subsidy, as is already the case for unprofitable railway lines. That may trigger a boom of new local operators who can serve the routes with lower costs than Sweden Post.