Goals for the deregulation of the postal sector in Sweden

The first Commission analysing reforms in the telephone and postal sectors, 1989¹⁸ Following deregulation of the financial sector, taxi and air, a Government Commission was appointed in 1988 to analyse reforms in the telephone and postal sector. Most of its report is on deregulation of the telecom sector, which was identified as exposed to rapid technological change. For the postal sector, however, the conclusion was that regulation should continue as before. Cross-subsidies within the Post Office were found to be the best way to finance its regional and social responsibilities¹⁹, the monopoly should remain and liberalisation await further steps within the EU (despite the fact that Sweden was not a member of the EU until 1995). Thus, the first study on liberalisation proposed business as usual – no further steps towards liberalisation in the postal sector.

The Social Democrats’ growth bill, 1990²⁰

Faced with low economic growth since 1970 and a falling relative position for Sweden in GDP per capita, the Social Democratic government submitted a bill to the Parliament in 1990 with measures for promoting growth. Deregulation was regarded as a means to stimulate economic growth. Well functioning markets with more efficient competition as well as the development and rationalisation of the state sector and its authorities were mentioned as two important areas of reform.

The postal sector was considered an important part of the infrastructure, which is crucial to economic growth. Taking into account increasing competition from new communication technologies and competing firms without any social responsibilities, it was considered necessary to give the Post Office freedom to act in a business-like way. Being a public enterprise, its possibilities to meet new competitors were limited. Moreover, decreased profitability in the post office network was identified as a threat to regional over-the-counter services. Unlike the Government Commission, changing conditions were found to jeopardise the possibilities for the Post Office to fulfil its regional and social responsibilities.

Thus, the Social Democrats were liberalisation-friendly in order to stimulate growth in general and to safeguard the Post Office from emerging competition and preserve regional responsibilities. This bill resulted in increased freedom for and reform of the Post Office

18 SOU 1990:27 Post och tele – affärsverk med regionalt och socialt ansvar

19 What we today know as ”universal services” was in Sweden called “regional and social responsibilities” until an adjustment of terminology to the EC Directive in 1997.

20 Prop. 1990/91:87 Näringspolitik för tillväxt

mentioned in section 2.2. The bill also proposed that a new study of the particular conditions for reform of the postal sector be made.

Ministry of Communications studies on the competitive conditions of the postal sector, 1991²¹ This study concluded that it was possible to maintain daily and nationwide service with cross-subsidies, because the Post Office had a natural monopoly. In the growth bill, increasing competition was identified as a danger. A pre-condition for meeting this competition was that the Post Office should be allowed to adjust its price structure in a more market oriented way in response to competitors that entered on profitable segments and pursued cream-skimming.

The Post Office was expected always to be able to offer a lower price because of its economies of scale. According to that study, the supposed existence of a natural monopoly would not make it beneficial to have competition in the postal sector because the total cost for society would in that case increase. If two companies are to share the market, the estimated increase in cost would be around 20% according to the study. It was also stated that it was correct to continue to cross-subsidise in order to preserve regional responsibilities.

The study ended with a contradictory conclusion: despite the supposed natural monopoly character and increased costs with duplication, the monopoly on letters was thought to be removed. There is no detailed explanation to this conclusion, e.g. a reference to contestability.

But the conclusion fitted well with the intentions of the Post Office to trade deregulation for becoming a public company with increased independence. A majority in a consultative procedure later supported the conclusion of the study. Because the Post Office could meet competition, thus avoiding wasteful doubling of production, competition ought to be introduced.

This was the first time the postal sector was described in terms of a natural monopoly.

However, the basis for calculating the effects of having two firms appears to be very weak.

Moreover, the conclusion of the report must be incorrect. If there was a natural monopoly and a competitor would enter the market with the same cost structure as the Post Office and the latter has additional costs for regional responsibilities (e.g. for the universal service in rural regions), the competitor would – according to traditional economic analysis - take over the whole market.

The conclusion that the Post Office would be able to meet competition in a liberalised setting accordingly cannot owe to natural monopoly, but to – historically founded - cost advantages compared to new entrants. Thus, the basis for proposing a removal of the monopoly in the study that solely referred to natural monopoly in the sector as a whole rested on incomplete understanding of the market.

At the same time, another study analysed the company form in the railway, telecom and postal sectors. The conclusion was that postal services were the least likely of the three to be privatised but that there was room for competition by outsourcing within the Post Office and in some sub-markets. The best organisational form for the Post Office was supposed to be a public, state-owned company, because the state had up to then failed to benefit from the advantages of the particular ’public enterprise’ company form.

21 Ds 1991:44 Postens Konkurrensförutsättningar. Ds 1991:77 SJ, Televerket och Posten – bättre som bolag?

The new non-socialist government’s bill on economic policy, autumn 1991²²

At the same time as the Ministry of Communication’s reports were presented, a new, non-socialist government was elected: a coalition between four parties and dependent on a fifth party for majority.²³ In its first bill, it presented its general economic policy. Deregulation, competition and reducing the size of the public sector were important components of its policy. An exception, however, were sectors with natural monopoly character, as they were interpreted at that time. When making state companies public, natural monopolies should be separated, continue to be owned by the state, act neutrally and promote competition in adjacent areas. Considering the conclusions in the Ministry of Communication’s report, postal services were not the first on the agenda to be liberalised.

The new non-socialist government’s first budget bill, January 1992²⁴

A few months later, the new government presented its first budget bill. It included a new perspective on private ownership and business and a sharpened competition policy as means to end the recession in the early 1990s. In the postal sector, once again increased competition and new technology were noticed as changing conditions. It was suggested that the Post Office be transferred into a public company and in the future the monopoly be removed.

Before that, the issue of regional and social responsibilities as well as the competitive conditions for the Post Office had to be resolved.

The non-socialist government thus carried on the agenda set forth by the Social Democrats and studied by the Ministry of Communications. The two salient issues were the regional and social responsibilities and how the Post Office should be able to compete “on equal terms”.

The latter problem related to competitive disadvantages for the Post Office, as opposed to later when the Post Office has been blamed for its competitive advantages. The concrete result of the budget bill was that a new Government Commission was appointed to prepare for deregulation and find solutions to the two remaining problems.

The bill on removal of the letter monopoly, December 1992²⁵

As mentioned in section 2.2, the new operator City Mail went bankrupt in October 1992, but was about to re-enter the market with new capital. A legal process to decide whether it had infringed the legal postal monopoly was going on. That was not the most desirable situation for the company when raising new capital. Then, the Minister of Communications submitted a new bill in December. He reversed the policy from earlier the same year and stated that competition could be introduced even if the issue of social and regional responsibilities was not yet resolved. The bill covered only two pages and stated that the Government

Commission had not completed its work, but it noted, referring to City Mail and another small operator, that there were contradictory signals concerning the competitive conditions. On the one hand there was a lawsuit against City Mail initiated by the Post Office. On the other hand, the government and the parliament promoted competition and a future deregulation of the

22 Prop. 1991/92:38 Inriktningen av den ekonomiska politiken

23 The non-socialist parties are The Moderate Party, The Liberal Party, The Centre Party and the The Christ Democrats (in order of size in the 1991 election). The fifth party was The New Democracy, who was only represented in parliament in the period 1991-1994. The other parties in parliament are The Social Democrats, The Left Party and The Green Party. 1994-2006, The Social Democrats have formed a minority government.

24 Prop. 1991/92:100 Budgetpropositionen

25 Prop. 1992/93:132 Vissa frågor inom Kommunikationsdepartementets område

postal sector had been announced. The Post Office itself already wanted to get away with monopoly, which was regarded rather as a burden for the business strategy of the company.

The Minister referred to the study made by the Ministry before, which had showed that competition ought to be introduced. Thus, the minister proposed the parliament that the monopoly could be removed even without any new legislation to replace it. The respective decision was taken in Parliament the last night before Christmas 1992 and the monopoly was removed shortly thereafter, on 1 January 1993.

The Government Commission on the new Postal Act, January 1993²⁶

When the Government Commission completed its work shortly after the monopoly was removed, deregulation had already started. The fundamental question about the postal monopoly was treated only in a single sentence in the report. “Free competition is generally regarded as a valuable means of making postal services as efficient as possible”. The removal of the monopoly and making the Post Office into a public company could be seen as steps in a process of making postal services more efficient and in making the state

organisation better suited to meet competition from other private competitors. Focus in the report was on technical issues and the discussion of goals and principles very limited.

After a long period with a consultative procedure and the government’s bill, in which the reform was submitted to parliament, the second part of postal liberalisation in Sweden was completed in March 1994.