Background

Australia Post’s reserved services

Australia’s postal service is delivered by Australia Post, a Government Business Enterprise (GBE). The Australian Postal Corporation Act 1989 (the APC Act) imposes a community service obligation (CSO) on Australia Post to supply a letter service. A CSO arises when a service provider is tasked to undertake a non-commercial business activity to meet social objectives. The APC Act requires Australia Post to supply a letter service that is ‘reasonably accessible to all people in Australia on an equitable basis, wherever they reside or carry on business’[1]. In particular, the letter service must be available at a single uniform rate for standard letters carried by ordinary post (‘the basic postage rate’). Subordinate legislation sets the performance standards Australia Post must meet in providing its services[2].

Under the APC Act, Australia Post has the exclusive right to collect, carry and deliver letters within Australia that (subject to exceptions) weigh not more than 250 grams. These statutory monopoly services, along with the right to issue postage stamps, are termed Australia Post’s ‘reserved services’^[3]. Australia Post was given this statutory monopoly so that revenue from its reserved services could fund the cost of meeting its CSOs[4]. However, Australia Post must deliver its CSOs regardless of whether revenue from its reserved services is sufficient to cover the costs of the CSOs.

Other letter services

Within the domestic reserved letter service Australia Post offers a number of different categories of mail. Ordinary letter services are offered at three postage prices—currently $0.60 for small letters (the basic postage rate), $1.20 for large letters up to 125 grams, and $1.80 for large letters over 125 grams and up to 250 grams. Other letter services—used mainly by businesses, government agencies and not-for-profit organisations—are generally offered at prices lower than those of equivalent ordinary letter services, as follows.

·         The PreSort Letters service offers discounted prices to customers who can apply barcodes when addressing their letters, sort them into a particular order, place them in appropriately-labelled trays, and complete documentation prior to lodgement at designated postal outlets. Australia Post offers the PreSort Letters service with regular and off-peak delivery time frames. The minimum lodgement volume is 300 barcoded letters of the same size and weight step.

·         Charity Mail provides discounted prices for barcoded PreSort small letters sent by income tax-exempt charities. Mailings must meet all other requirements of the PreSort Letters service.

·         The Acquisition Mail service allows customers to geographically target an addressed-mail campaign to residential addresses in specific postcodes, suburbs or Census Collection Districts. Letters must be barcoded, sorted into appropriately-labelled trays and lodged at designated postal outlets. The Acquisition Mail service is provided on the off-peak delivery time frame and has a minimum lodgement volume of 30 000 letters.

·         Clean Mail is a service for smaller machine-addressed letters prepared in accordance with specific addressing and presentation requirements. Addressing conditions include certain mandatory requirements such as layout and font size and style. Articles do not require sorting but must be lodged in trays at designated postal outlets. Clean mail is provided at the regular delivery time frame and has a minimum lodgement volume of 300 letters.

·         Impact Mail covers non-rectangular mail (such as shaped postcards, form-cut brochures, die-cut booklets or multidimensional folds) and attracts higher prices than ordinary postage prices. The minimum lodgement volume is 300 articles.

·         Under the Metered/Imprint Mail service, a discount is available against ordinary postage rates where the postage is paid for by postage meter, or via the use of the ‘Postage Paid’ imprint (and payment by an Australia Post charge account).

·         The Local Country Letters service provides for discounts where senders who reside or carry on a business in specified postcodes lodge letters at an Australia Post delivery office for delivery in that, or an adjoining, delivery area. The minimum lodgement volume is 50 letters (or 10 in small communities with fewer than 1000 delivery points).

·         The Reply Paid letters service provides for the charging of mail recipients rather than senders. Some Reply Paid postage prices are higher than the equivalent ordinary postage prices as there are additional costs associated with extracting and counting the letters to bill recipients.

Additionally, Australia Post sells a range of prepaid envelopes and postcards, and offers a discount on postage for seasonal greeting cards during November and December.

The term ‘other letter services’ is used in this paper to cover all those domestic reserved letter services that are not ordinary letter services, as listed in Appendix A. This includes categories of letters commonly referred to as ‘bulk mail’, given minimum volume requirements[5].

Other letter services represent just over 80 per cent of Australia Post’s domestic reserved letters service business, both by volume and revenue[6]. PreSort Letters are the single largest category of mail and represent approximately half of total letter volumes and revenue. Some other letter services are offered at a significantly lower rate than the equivalent ordinary letter service. For example, the least expensive price for an Acquisition Mail small letter is approximately half the basic postage rate at $0.31, while the least expensive price for a small PreSort letter is less than three quarters of the basic postage rate at $0.424. However, other non-ordinary services are offered at rates much closer to the equivalent ordinary letter service. So, for example, postage for metered/imprint letters is only 3 per cent less than equivalent ordinary rates. (Appendix A details current prices for domestic reserved letter services.)

Other letter services are used by a range of businesses, charities and government agencies, either directly or through mailhouses. Australia Post estimates that there were some 7500 users of PreSort, Charity, Acquisition, Impact and Clean Mail in 2010–11. Almost 60 per cent of letters in these categories were in lodgements of 10 000 or more. Approximately three quarters of all letters in these categories are sent by business in the communications and financial and insurance industry segments, and by government agencies. The top 50 PreSort, Charity, Acquisition, Impact and Clean Mail customers were responsible for approximately 60 per cent of such letters in 2010–11. Table 1 shows numbers of customers by annual lodgement volumes.

Table 1: PreSort, Charity, Acquisition, Impact and Clean Mail customers in 2010–11 by annual letters volume

† These numbers reflect customers paying by account—a further 17 million letters were sent by customers paying by other means.

Additionally, around 60 000 businesses and organisations use Australia Post charge accounts for Imprint Mail, and around 14 000 have postage meters. Around 19 000 customers have permits to use Reply Paid.

Other letter services are predominantly used for transactional and promotional purposes. Transactional mail covers the communication of information to existing customers concerning their existing dealings, and includes things such as bills, statements, invoices, changes to terms and conditions, new credit or membership cards, business/membership/subscription renewals, payments, etc. Promotional mail covers the communication of offers and requests to new or existing customers, and includes things such as offers of goods or services, requests to donate.

Prices surveillance of the reserved services

Australia Post’s reserved letter services are notified services (and Australia Post is a declared person) under the prices surveillance provisions of the Competition and Consumer Act 2010 (the CCA)^[7], previously the Trade Practices Act 1974. This means that Australia Post must notify the Australian Competition and Consumer Commission (the ACCC) if it proposes to:

·         increase the price of a reserved letter service

·         introduce a new service that would fall within the definition of reserved letter services

·         provide an existing reserved letter service under terms and conditions that are not the same or substantially similar to the existing terms and conditions of that service.

The ACCC must notify Australia Post that it has no objection to the proposed changes prior to Australia Post giving effect to them. This scrutiny by the ACCC is intended to promote efficient pricing and consumer protection where there is reduced competition.

The current prices surveillance provisions can be traced back to the enactment of the Prices Surveillance Act 1983 (the PSA). The PSA was introduced at a time of relatively high inflation, and was intended to bring about pricing restraint among private and public sector business enterprises. However, since then the economic environment has changed and the focus of prices surveillance has moved from a prices and income policy role to one of competition policy. Today, the criterion for declaring areas for prices surveillance is focused on those markets where competitive pressures are insufficient to achieve efficient prices and to protect consumers.

Australia Post’s commercial obligations

Australia Post is prescribed by the Commonwealth Authorities and Companies Regulations 1997 as a GBE[8]. A principal objective for each GBE is that it adds to shareholder value by, among other things, earning at least a commercial rate of return. Earning a commercial rate of return includes fully recovering the costs of resources employed, including capital, and working towards a financial target and a dividend policy agreed with shareholder ministers. The rate of return should be at least sufficient to justify the long-term retention of assets in the business, and to pay commercial dividends from those returns[9].

Similarly, the APC Act imposes commercial obligations on Australia Post. Section 26 of the APC Act imposes an obligation on Australia Post, as far as practicable, to perform its functions in a manner consistent with sound commercial practice. Section 38 specifies a number of matters that Australia Post must have regard to in setting financial targets, including the need to earn a reasonable rate of return on Australia Post’s assets, the expectation of the Commonwealth that Australia Post will pay a reasonable dividend, and the need to maintain Australia Post’s financial viability.

Additionally, Australia is a member of the Universal Postal Union (UPU) of the United Nations. Under article 3.4 of the UPU convention, Australia is required to ensure that its universal postal service is provided on a viable basis, thus guaranteeing its sustainability[10].

For Australia Post to meet these commercial and international obligations, it is important that, to the maximum extent possible, its reserved letter services operate on a financially self-sustaining basis.

The problem

Increased competition from digital communications such as email and social networking websites has lead to a decline in letter volumes. Domestic letter volumes declined by 4.1 per cent in 2008–09 and a further 4.2 per cent in 2009–10, or approximately 400 million items over two years.[11] Without increased flexibility to respond to market opportunities and customer needs in its letters products and services, Australia Post’s ability to counter this decline will reduce. This, in turn, will compromise Australia Post’s capacity to fund the delivery of its CSOs from monopoly reserved services revenue. If losses from reserved services continue to grow, they could not only adversely impact Australia Post’s ability to deliver a universal letter service but also reduce Australia Post’s capacity to make dividend payments to government.

The physical letter market has changed substantially over the last two decades and there is now considerable and increasing competition to letters from digital communications, such as email and social networking websites. These digital services provide competitive pressures on the reserved letter services and so reduce Australia Post’s ability to exercise monopoly market power. As long as ordinary letter postage rates continue to be subject to scrutiny by the ACCC, these will act as a natural ceiling to the prices that Australia Post can charge for other letter services. These two factors combine to mean that ACCC scrutiny of changes to the prices of other letter services is no longer necessary.

Flexibility in reserved services

Given the complexity of the issues considered by the ACCC and the need to consult with stakeholders, prices surveillance processes can be time-consuming—the ACCC took approximately five months to consider price notifications in 2008 and in 2009—and reduce Australia Post’s flexibility to respond quickly to market changes and opportunities. Following receipt of a draft notification from Australia Post, the ACCC typically releases an issues paper and a draft decision, and calls for public submissions on each of these documents, prior to making a final decision. The regulatory requirement for prices surveillance itself, along with the lengthy processes to implement it, restrict Australia Post’s ability to plan and to innovate in the design of the products it offers to businesses and organisations in response to their needs.

Australia Post has introduced a number of new reserved letter services to meet market needs—Impact Mail in October 2004[12] and Acquisition Mail in September 2008[13]—and changed the terms and conditions of existing services—revisions to Off Peak delivery timeframes for PreSort letters, Charity Mail and Acquisition Mail in July 2011[14]. However, in each of these cases, Australia Post had to submit its proposed changes to the ACCC, thus delaying their introduction. In its non-reserved mail business, Australia Post has been able to introduce new products and services—such as the eBay co-branded flat-rate satchels and Click and Send service, eLetter ticket, Sample Post and new 24/7 parcel collection hubs—without reference to the ACCC.

Funding the community service obligation

Until about 2000, a strong correlation existed in Australia between growth in letter volumes and growth in GDP. This is no longer the case—the decoupling of mail volume from GDP is shown in Figure 1. Similar trends have occurred worldwide and reflect changes in technology and consumer behaviour, which are driving a global decline in letter volumes as consumers substitute physical mail with electronic communications. This decline was exacerbated by the global financial crisis. In effect, digital communications such as email and social networking websites are competing with physical letters in markets where postal operators such as Australia Post have had a traditional monopoly. Postal operators around the world are revising their business models to adapt to the loss of revenue from this decline in mail volumes.

Figure 1: Real GDP and mail volume (index 1992–93 = 100)

At the same time as mail volumes have been decreasing, the size of Australia Post’s delivery network has increased. This is because Australia Post is obliged to deliver to all addresses in Australia, and new business and household addresses are increasing by around 200 000 per annum[15]. In 1999–00 Australia Post handled some 5.2 billion mail articles and delivered to approximately 8.8 million delivery points, or approximately 590 mail articles per delivery point. In 2009–10 the equivalent figures were 5.1 billion mail articles handled, 10.7 million delivery points and 480 mail articles per delivery point.

Declining letter volumes and rising costs have led to unsustainable financial losses in Australia Post’s domestic reserved letter services in recent years. Reported losses were $58 million in 2008–09 and $127 million (excluding one-off restructuring expenses) in 2009–10. Additionally, Australia Post is forecasting a loss of more than $100 million for 2010–11. Losses from the reserved services are currently covered by other, profitable, commercial activities undertaken by Australia Post. Table 2 shows the decline in letter business revenue, both outright and as a proportion of goods and services revenue. It also shows the impact on the decline in dividends to government in recent years.

Table 2: Decline in letter business revenue[16]

^{† Includes impact of special dividend of $150m paid in 2008–09.               ‡ Includes impact of one-off restructuring expenses of $150 million.}

There is a financial ‘cost’ associated with meeting the CSOs. The cost arises where the charges for mandated services do not recover the costs of providing them—the cost is measured on a net basis after reduction of related revenue. CSO costs have increased over time, and have been in the order of $120 million over the last two years[17]. Australia Post was given its statutory monopoly over reserved letter services in order to meet the costs of delivering its CSO. At the time the APC Act was enacted 22 years ago it was envisaged that profits from reserved services would be sufficient to fund CSO costs. In effect, Australia Post has previously funded its CSOs by means of an internal cross-subsidy within its reserved letter services. However, in 2008–09 and 2009–10, domestic reserved letter services as a whole have operated at a loss. Given that Australia Post must deliver its CSO regardless of whether the reserved services statutory monopoly delivers sufficient profits to fund the costs of the CSO, it has effectively had to be funded by Australia Post’s non-reserved mail business and other commercial activities[18]. How long this can continue will depend on the level of future losses from the reserved service and profits from Australia Post’s commercial activities[19]. Without action in the short-to-medium term, it is likely that Australia Post’s letter services will become a drain on the Commonwealth Budget.

Consequences of no action

As a result of the current pricing surveillance arrangements, Australia Post is not able to make rapid changes to reserved services postal products to respond to changing market conditions.

Financial losses from the reserved services are currently covered by profits from Australia Post’s other non-reserved mail and commercial activities. If no action is taken and losses from reserved letter services continue to grow, they will undermine Australia Post’s ability to fund its CSO to provide a universal letter service, along with financial dividends to the government.

Is there relevant regulation in place?

There is now significant competition to letters from digital communications such as email and social networking websites, making Australia Post’s reserved services increasingly unprofitable. In this environment, Australia Post needs to be able to position itself flexibly in the communications market and respond to market opportunities and changing consumer demands, so that it can maintain a sustainable letters business and meet its CSOs.

Given the growing take-up of electronic communications, the competitive pressures on Australia Post’s reserved letter services are increasing, and the value of its statutory monopoly is declining. While there may be limited price elasticity of demand for letters (see discussion below), in the wider context of the overall communications market the continued application of ACCC prices surveillance to the entirety of Australia Post’s reserved letter services could be considered to be unnecessary regulation. The regulatory framework has clearly not kept pace with changes in communications technology, and business and society’s adoption of these changes.

Objectives

The government’s objective is to provide a regulatory framework that contributes to Australia Post’s flexibility to operate a viable and sustainable letters business, in the context of the CSOs identified in the APC Act and the Australian Postal Corporation (Performance Standards) Regulations 1998. At the same time, the government has an objective of ensuring that an appropriate level of protection continues for consumers of Australia Post’s monopoly services.

Options

The Prime Minister has agreed that the following two options be considered in this regulation impact assessment:

1.       removal of ACCC surveillance of other letter services prices, and

2.       retention of current arrangements.

Under the first option, notified services would be limited to Australia Post’s ordinary letter services (currently the basic postage rate of $0.60, and large letter rates of $1.20 and $1.80) and all other letter services listed in Appendix A would be removed from the CCA declaration. Postage rates for ordinary letters would remain subject to ACCC scrutiny and would effectively operate as ceilings for most other reserved letter services. Additionally, Australia Post would have the flexibility to introduce new reserved letter services without reference to the ACCC.

Impact analysis

General

The impact on stakeholders of the proposed change will depend on the nature of new reserved letter products that Australia Post introduces and the level of future price increases it puts in place. The ACCC has not generally objected to price notifications for other letter services[20]. If future price variations are reasonable and not excessive, all other things being equal it is likely that removing prices surveillance will make little difference to stakeholders over the long term, relative to what would have occurred if prices surveillance had remained in place.

Price elasticity of demand for letters

Price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good or service to a change in its price. A price elasticity of 0.5, for example, means that for a 10 per cent increase in price there will be a 5 per cent reduction in demand. In general, the demand for a good is said to be inelastic when the price elasticity is less than one and changes in prices have a less than proportional effect on the level of demand.

In the recent price notification process for selected other letter services^[21], Australia Post asserted that such letters are inelastic to price, and that econometric modelling for PreSort letters has not identified real price as being statistically significant^[22]. On this basis, Australia Post assumed that the proposed notification price increases would not affect aggregate letter volumes.

However, Major Mail Users Australia has argued that ‘postage budgets’ are being replaced by ‘communications budgets’, and that any increase in postage prices will hasten the search for e-alternatives to paper mail[23].

Allowing Australia Post to set prices for other letter services is expected to have some impact on aggregate mail volumes.

·         A 2006 meta-study of 45 previous studies across a number of advanced economies and postal products identified a range of price elasticities between 0.2 and 0.8^[24].

·         A study commissioned by the United States Postal Service Office of Inspector General implies a price elasticity of demand for the US Postal Service of 0.4^[25].

·         A recent report from the Postal Services Commission of the UK supports Royal Mail’s estimate of an overall price elasticity of mail of around 0.35, with different price elasticities for different mail segments—0.2 for transactional mail, 0.4 for social mail and 1.0 for advertising mail^[26].

·         Similarly, when conducting a sensitivity analysis of Australia Post’s price notification earlier this year, the ACCC assumed a price elasticity of 0.4[27].

It is likely that price elasticity of demand will vary between Australia Post customers. For example, businesses and organisations that deal with people who tend not to use online services, such as the elderly or communities without access to the internet, are likely to have lower price elasticities. Similarly, it is likely that price elasticity will not be constant, but rather will be stepped and depend on the size of any price increase. A large price increase may have a higher price elasticity, whereas smaller price increases may have much smaller or negligible price elasticities. While there is considerable and increasing competition to letters from digital communications such as email and social networking websites, there are some documents that must be sent by post. In 2009, an Australia Post analysis identified some 2500 references in legislation, regulations and codes of practice across all Australian jurisdictions to sending or serving of documents such as notices, decisions or ballot papers by post or mail[28]. Over 80 per cent of these provide for alternative means of communication[29]. However, a number of consumer codes, for example, do not allow for e-communications on documents related to repossession or default proceedings. Australia Post estimates that less than 150 of these legislative references have anything other than a minimal impact on mail volumes. While it is difficult to estimate the volumes of transactional mail that are mandated by legislation as the only method of communication, they are likely to decrease as governments move to develop other communications channels in the context of the developing digital economy.

1.   Removal of prices surveillance from other letter services prices

Impact on Australia Post

Australia Post is likely to be a significant beneficiary of any move to remove ACCC prices surveillance from other letter services.

Removal of ACCC prices surveillance of other letter services would allow Australia Post to respond more quickly to market opportunities and to innovate and introduce new products. At the same time, it would provide Australia Post with more certainty in its financial planning, as it would be able to plan for price increases without the uncertainty of ACCC processes. It would also lead to reduced costs to Australia Post in the order of $1 million a year associated with no longer having to prepare and pursue price notifications for other letter services^[30]. These factors would assist Australia Post to counter the decline in the profitability of its domestic letters business, and hence increase its ability to meet its CSOs.

It is not possible to predict precise price changes to other letter services in the absence of ACCC scrutiny, nor whether these changes would have occurred anyway. However, they are more likely to increase than decrease, given the current losses made by reserved letter services as a whole. If, for example, Australia Post was to increase its prices for PreSort Letters, Acquisition Mail and Charity Mail by 5 per cent, it would generate some $25 million (GST-exclusive) in additional revenue in a full year, assuming a price elasticity of 0.4^[31]. The equivalent increase for a 2 per cent price rise would be $10 million.

Impact on business and not-for-profit organisations

Businesses and not-for-profit organisations would benefit from these changes to the extent that Australia Post works with them to introduce new reserved letter products and services to meet their needs. As noted above, Australia Post has previously introduced new products to meet market needs. They would now benefit from quicker implementation of such changes. Businesses and not-for-profit organisations are likely to have a greater range of letter products available with which to tailor their communication with their customers.

As noted above, it is not possible to predict precise price changes to other letter services in the absence of ACCC scrutiny but it is likely that they would increase. A 5 per cent increase to prices for PreSort Letters, Acquisition Mail and Charity Mail would be likely to increase cost to a business sending 20 000 small PreSort letters somewhere in the order of $420 to $500 (GST-inclusive). The equivalent increases for a 2 per cent price rise would be $170 to $200.

Postage rates for ordinary letters would remain subject to ACCC scrutiny and would effectively operate as ceilings for most other letter services. Price differentials between ordinary letters and services such as PreSort Letters, Acquisition Mail and Charity Mail in part reflect the additional costs incurred by senders in preparing and lodging their letters in such a way that reduces costs to Australia Post. If Australia Post reduces these price differentials such that senders no longer consider they adequately compensate for their preparation costs they could chose to use ordinary letter services instead, thus shifting costs back to Australia Post. Similarly, for those services where current prices are higher than ordinary postage rates Australia Post would be constrained by what customers are willing to pay for these value-added services. Customers could choose to use ordinary letter services where it is more cost-effective for them to do so. Therefore, while demand for postal services may be relatively price-inelastic, there will still be constraints on how much Australia Post can increase postage rates.

Increases to other letter services postage rates would have an adverse impact on businesses and not-for-profit organisations to the extent that such mail is an input cost. Some businesses and organisations produce significant volumes of transactional mail, and/or use promotional mail to generate new business and revenue. To the extent that price increases result in reduced mail volumes over and above decreases already occurring as a result of e-substitution, secondary businesses such as printers, stationery providers and mailhouses may face adverse impacts.

Impact on ordinary consumers

Consumers are likely to benefit from an increased range of letter-service options by which businesses and not-for-profit organisations are able to communicate with them.

It is likely, though unknown, whether any increase in postage rates would result in senders of mail increasing their prices to consumers of their products and services. Postage costs are likely to be just one of many costs that feed into the determination of their prices. Postage is not the only cost associated with sending letters, as there are also costs such as stationery and printing.

Impact on the ACCC

Removal of prices surveillance may allow the ACCC to redirect its limited resources more efficiently to other priorities. However, the ACCC has advised that it expects realisable resource savings associated with proposed changes to be negligible[32].

The ACCC will, however, retain two other legislated roles in relation to Australia Post. Section 32B of the APC Act and Part 3 of the Australian Postal Corporation Regulations 1996 (APC Regulations) provide for the ACCC to inquire into certain disputes about bulk mail services[33]. These provisions relate to the terms and conditions of rate reductions (including the amount of rate reductions) for the delivery of bulk quantities of letters by Australia Post in return for the customer performing functions in relation to the letters that could otherwise be performed by Australia Post. The object of the provisions is to ensure that customers who use bulk mail services receive fair and reasonable rate reductions. While there have not yet been any disputes notified to the ACCC under these provisions, they would act as a deterrent to Australia Post increasing prices significantly.

Part 4A of the APC Act provides for the ACCC to require Australia Post to keep records and to provide these records to the ACCC[34]. One of the purposes of these powers is to address concerns raised by some of Australia Post’s competitors that it is unfairly competing by using revenue from its reserved letter services to cross-subsidise the services it provides in competition with other businesses. Each year the ACCC issues a report of its analysis of Australia Post’s regulatory accounts for the previous year and identifies whether there are any potential cross-subsidies both between and within its reserved (monopoly) and non-reserved (competitive) services. In the case of removal of prices surveillance from other letter services, these cross-subsidy reports would assist in identifying if Australia Post was abusing its price setting powers to achieve monopoly profits.

Impact on the Commonwealth

To the extent that Australia Post becomes more profitable, the risk of the Commonwealth’s overall Budget position being adversely affected will be ameliorated, as Australia Post may be able to make higher dividend payments. Additionally, the government’s postal policy objectives in terms of CSOs will be supported by a more sustainable and viable letters business. However, at the same time, to the extent that government agencies as senders of mail are subject to price increases greater than indexation of their funding, there could be some impact on program budgets.

Summary of costs and benefits

Removal of ACCC prices surveillance from other letter services would benefit Australia Post by providing greater flexibility in its ability to respond to the market, and greater certainty in its financial planning. To the extent that Australia Post is able to counter the current decline in letter volumes by offering new letter products, it may improve the sustainability of its letters business. To the extent that it increases prices for other letter services, Australia Post may improve the sustainability of its letters business. Australia Post’s customers may benefit from an increased range of letter services with which to communicate with their customers. Any prices increases would adversely impact mail users such as businesses, charities and government agencies. However, price increases occur under existing arrangements in any event. Additionally, the ACCC would maintain a role in helping to ensure that Australia Post could not abuse its monopoly position, through continuing to scrutinise ordinary letter prices and its other legislated roles.

2.   Retention of current arrangements

Retaining the status quo may mean ongoing, and possibly increasing, financial losses from the reserved letter services if letter volumes continue to decline. This would not meet the objective of a financially self-sustaining letter business.

In the past, falling revenue has been countered, at least partially, by cost efficiencies and/ or postage price rises. Australia Post has also diversified into other related activities to build business sustainability. Ducasse et al (2008) note the difficulties postal operators face in balancing competing priorities as part of their efforts to find sustainable business models[35]. While increasing the range of products aimed at different customer segments may increase revenues, it also runs counter to the objective of reducing costs as postal operators need to support the increased range of products.

Cost reductions

Costs of providing a postal universal service obligation arise from two main sources—the need to provide a service to everyone no matter where they live, at an affordable price, and the need to operate and maintain a network of post outlets that are accessible to everyone[36].

Labour costs make up over 60 per cent of costs for Australia Post’s reserved letter services delivery[37], and it is in the process of making staffing reductions in response to declining letter volumes. While labour costs suggest an obvious place for cost reductions, the ability to make reductions in staffing is not necessarily directly linked to declines in letter volumes, as Australia Post is required to deliver to all delivery points regardless of whether there is one letter or one hundred letters for a particular delivery point. These staffing reductions will be offset, at least in part, by growth in other areas, particularly parcels and warehousing and logistics[38]. These adjustments are being made through Australia Post’s Value Optimisation Program (VOP), which commenced in October 2009. The VOP consists of three elements—a new organisational design, a new operating model and establishment of a performance-based culture[39]. Staff will also be affected by Australia Post’s business renewal program (Future Ready).

Australia Post has also implemented cost efficiencies by changes to its operating procedures. The ACCC note that Australia Post’s Future Delivery Design Program includes three key elements[40]:

·         using enhanced optical character recognition (address recognition) software to provide additional labour savings

·         extending automated small letter sequencing to enable the sorting of machine-addressed mail to the street delivery sequence, and

·         reconfiguring the mail delivery network to obtain benefits from automation such as through optimising delivery rounds.

Despite these measures, the ACCC considers that Australia Post is still falling behind world’s best practice in the deployment of automated sorting and sequencing technology[41]. However, further capital investments in automated processing may be difficult to justify in the context of declining letter volumes. Without government intervention to stem losses from the reserved service, further productivity improvements and greater cost efficiencies will be necessary.

Summary of costs and benefits

Retention of current arrangements would provide benefits to mail users to the extent that they would be able to raise concerns about proposed price increases for other letter services as part of the ACCC prices surveillance process. However, it would not necessarily stop any proposed price increases. Additionally, it would continue to limit Australia Post’s flexibility to respond to market opportunities, and limit certainty in its financial planning. Retaining the status quo may mean continued losses from the reserved letter services—compromising not only Australia Post’s ability to deliver its universal letter service CSOs, but also a return to government through payment of dividends.

Consultation section

The Department of Broadband, Communications and the Digital Economy prepared a discussion paper on possible changes to prices surveillance arrangements and placed it on its website on 8 June 2011[42]. This was linked to the ‘What’s new’ section of the department’s homepage. The department wrote to the following organisations that have consistently provided submissions to the ACCC on previous Australia Post price notifications on the same day seeking their comments:

·                Major Mail Users Australia Limited (MMUA)

·                Post Office Agents Association Limited (POAAL)

·                Australian Direct Marketing Association (ADMA)

·                Printing Industries Association of Australia (PIAA).

Additionally, the department wrote to Australia Post and the ACCC seeking comments.

The due date for submissions was 7 July 2011, and the department received five submissions. Submissions are available on the department’s website[43], and can be summarised as follows.

MMUA

MMUA represents customers who collectively lodge over 80 per cent of bulk PreSort mail and is strongly opposed to the proposal to ‘give Australia Post a free hand in setting prices within its monopoly services’.

MMUA considers that it is a question of principle as to whether or not an organisation given a statutory monopoly should be able to set its own price levels. Or, indeed, whether such a monopoly should be allowed to continue without some form of examination of the continued relevance of the conditions that gave rise to the monopoly, and how the organisation has handled the monopoly powers.

MMUA notes that current price discounts for bulk mail are tied inextricably to prior work by mail generators (for example, presorting and barcoding) in preparing the mail prior to its lodgement. MMUA notes that, in accordance with the Australia Post–MMUA code of practice, these productivity gains should be shared amongst all stakeholders.

MMUA considers that there is no need to change current prices surveillance arrangements, as it would reduce the already limited opportunities for consumers to have a say in these arrangements. MMUA notes that the proposal would remove all opportunities for its members to challenge bulk mail price increases before an independent umpire, including whether there has been adequate consultation or whether discounts adequately reflect the work done by mail generators. MMUA suggests that the current proposal appears to be predicated on making life easier for Australia Post and the ACCC by removing customers from the equation.

MMUA notes that for high-volume users of Australia Post letter services there is no marketplace competition available, and that therefore prices surveillance should be retained, as there are insufficient competitive pressures to achieve efficient prices and protect consumers. However, the MMUA also notes that businesses are replacing ‘postage budgets’ with ‘communications budgets’, and that its members advise that every increase in price of postage simply means a shrinkage in usage of paper-mail and the search for ways and means of using e-alternatives to communicate. MMUA suggests that Australia Post has been unwilling to consider suggestions by it to improve the efficiency of bulk mail processes.

MMUA suggest that before bulk mail is removed from ACCC scrutiny there needs to be a reconsideration of and public inquiry into Australia Post’s CSO. MMUA notes that Australia Post has extended its business reach into a myriad of other products on the basis of its CSO and monopoly. It suggests that areas that should be considered in any review could include separating reserved services from other areas of Australia Post’s activity, changing the parameters of the CSOs and funding them from the federal Budget, removing business and advertising mail from Australia Post’s monopoly and appointing an industry regulator to examine proposals to make the reserved services more effective.

POAAL

POAAL is the membership association for the owners and operators of licensed post offices and for mail and parcel contractors who deliver on behalf of Australia Post. POAAL supports the focusing of ACCC prices surveillance on ordinary letter services and considers that Australia Post should be able to set prices for discount letter services without reference to the ACCC.

POAAL notes that its members are witnessing a fundamental shift in the community’s use of hard-copy mail, and considers that if Australia Post is to remain viable it needs to respond promptly to opportunities that the market presents. POAAL also notes that it has limited resources to review and respond to issues that can arise in ACCC price notification processes.

POAAL notes that there may be community concern that the proposed changes will reduce the ability to detect any cross-subsidies from Australia Post’s ordinary letter service. However, POAAL considers that the ACCC’s existing cross-subsidy reporting role provides adequate protection to the community and organisations competing with various aspects of the Australia Post business.

ADMA

ADMA represents over 500 businesses that operate in the marketing industry, and is extremely concerned by the proposal to limit the ACCC’s prices surveillance role to ordinary letter prices.

ADMA notes that for some businesses, which cannot readily move to the digital economy and e-substitution, demand for letter services is more inelastic. In this context, ADMA considers that ACCC’s independent oversight provides protection against Australia Post using its monopoly position to extract monopoly revenue. However, ADMA does acknowledge that continued ACCC scrutiny of ordinary letter prices will provide some safeguards.

ADMA is also concerned about potential conflicts of interest between Australia Post’s other business strategies (such as parcels and e-services) and PreSort letter services. ADMA is concerned that Australia Post will use increases in prices for PreSort letters to help it pursue its other business objectives. However, as noted in the discussion above, the ACCC will continue to have a role in monitoring for cross-subsidies between Australia Post products.

PIAA

PIAA represents some 1800 companies in the print, packaging and visual communication industries. PIAA members are directly involved in the provision of bulk mail services and in the production of printed material that is sent by bulk mail. PIAA believes that ACCC prices surveillance of other letter services should be retained.

PIAA does not believe that, despite the declines in mail volumes and Australia Post’s financial losses on reserved letter services, there is sufficient evidence to justify any changes to existing arrangements. PIAA considers that there is further scope for Australia Post to achieve efficiencies. It notes that, in the context of the recent price notification, the ACCC’s estimate of Australia Post’s under-recovery of efficient costs for reserved services is considerably lower than that of Australia Post.

PIAA considers that it would be unfair of Australia Post to move prices of other letter services to equivalent ordinary letter rates, as this would not acknowledge the fact that current discounts are generally the result of efficiencies that users have generated. PIAA is concerned that the removal of ACCC surveillance would allow Australia Post to increase prices without factoring in the value of these efficiencies.

PIAA considers that if timeliness of actual ACCC price notification processes is of concern then this should be addressed in its own right rather than removing third-party oversight of a monopoly provider.

PIAA notes that Australia Post currently consults with key stakeholders in the development of price notifications. However, PIAA is uncertain whether Australia Post will continue with the same level of consultation if the obligation to refer price increases to the ACCC is removed.

PIAA suggests that it may be timely to consider whether Australia Post’s monopoly on other letter services should continue, and proposes that any removal of ACCC scrutiny of reserved services should be accompanied by an opening of the market for the carriage of such services.

Australia Post

Australia Post supports the proposal. Australia Post notes that the proposal would provide it with the flexibility to respond more rapidly to market conditions and technology changes.

Australia Post notes that it has only sought moderate price increases in other letter services, and that overall reserved letter revenue does not cover efficient costs plus an appropriate rate of return on capital. In developing letter prices, it will continue to consider the relativities between price points and look to encourage and provide incentives to encourage the use of efficient other letter services (such as machine efficient letter formats) by reflecting specific cost savings associated with those services relative to the equivalent ordinary letter services.

Australia Post states that it will continue to undertake appropriate consultation with relevant stakeholders to facilitate mutual understanding with its customers, and to understand whether particular market segments would be disadvantaged by any proposed changes.

Discussion of issues raised

Australia Post freedom to set prices for monopoly services

MMUA, PIAA and ADMA raised concerns about Australia Post being able to set prices for statutory monopoly services. However, as noted above, there is now considerable and increasing competition to letters from digital communications, such as email and social networking websites. While Australia Post’s letters monopoly may be absolute, there is considerable competition in the wider communications marketplace. Additionally, prices surveillance would remain for ordinary letter prices. In setting discounts for other letter services, Australia Post would need to reflect the costs to customers of preparing and lodging mail for processing, or else customers could simply migrate to ordinary letter services. Australia Post’s Letter Pricing Principles[44] recognise that, as well as providing a cross-subsidy towards meeting the CSO of providing a universal letter service, prices for other letter services should broadly reflect the level of work saved through work carried out by customers. The ACCC’s continued legislated roles in relation to bulk mail disputes and monitoring for cross-subsidies will also mitigate abuse by Australia Post of its monopoly position.

MMUA and PIAA have also raised concerns that Australia Post will no longer consult about changes to prices and terms and conditions of other letter services if ACCC scrutiny is removed. In its submission, Australia Post has stated that it will continue to undertake appropriate consultation with relevant stakeholders to facilitate mutual understanding with its customers, and to understand whether particular market segments would be disadvantaged by any proposed changes. Australia Post recognises that stakeholder engagement is an important corporate responsibility, and has created a stakeholder council so that it can consult with customers, suppliers and community groups on issues relating to postal products and services[45].

Scope for efficiency and productivity improvements

PIAA and MMUA have both suggested that there is scope for further efficiency and productivity improvements in Australia Post processes, rather than removal of prices surveillance. However, a 2009 international benchmarking study by Economic Insights commissioned by Australia Post found that Australia Post had shown the most consistent improvement in total factor productivity of seven postal services in advanced economies over the seven years from 2002 to 2009. Additionally, when results were adjusted for mail and customer density, Australia Post’s total factor productivity was ranked first[46]. In its submission, Australia Post has stated that it is committed to continuing to achieve efficiency gains in service provision in order to be able to earn an economic return on supplying the reserved services.

Cross-subsidies

A number of submissions have raised concerns about the possibility of cross-subsidies between Australia Post’s reserved and non-reserved services under the proposed changes to prices surveillance arrangements. However, the ACCC would continue to have a role in monitoring for cross-subsidies.

Efficiency of ACCC review processes

MMUA and PIAA have argued that if the time taken by the ACCC to process price notifications is of concern, then ACCC processes should change, rather than removing prices surveillance. However, the ACCC has finite resources, and Australia Post price notifications are only one of a wide range of competition and consumer issues that it must consider. ACCC processes are a matter for the ACCC itself, but will by necessity be time-consuming, given the complexity of issues associated with a price notification and the need for consultation with stakeholders.

Broader review and changes to Australia Post’s community service obligations and monopoly

MMUA and PIAA have suggested that the scope of options under consideration should be broadened. However, the Prime Minister has agreed that the current process be limited to the two options under consideration.

Conclusion

Given that:

·                letters are now part of an increasingly more competitive overall communications market

·                Australia Post’s ability to fund its legislated CSO from within its reserved services monopoly is becoming increasingly more difficult in the context of declining letter volumes

·                the increased flexibility to respond to market opportunities would assist Australia Post’s revenue streams

·                ordinary letter prices would remain subject to ACCC scrutiny under the proposal, and would act as ceilings for prices for other letter services—that is, prices for other letter services would need to reflect an adequate discount for work undertaken by customers prior to lodgement, and

·                the ACCC would continue to have legislated roles in relation to disputes about terms and conditions of bulk mail services and monitoring for cross-subsidies between and within Australia Post’s reserved and non-reserved businesses

the preferred option of the two identified above is to remove ACCC prices surveillance of other letter services.

The benefits of this option to business in terms of a potential increase in available letter products, and the benefits to Australia Post and the government in terms of helping to ensure the viable delivery of the universal letter service CSOs and a financial return on resources, outweigh any potential costs to users of other letter services from possible price increases.

While this option will help Australia Post to address the problems it is facing, it should not be inferred that it has the greatest net benefit overall, as the regulation impact assessment process was limited to two options.

Implementation and review

Removal of ACCC prices surveillance oversight of other letter services will be implemented by revocation and replacement of the existing declaration under section 95X of the CCA by the Treasurer. It is envisaged that the new declaration will be made before the end of September 2011.

The Department of Broadband, Communications and the Digital Economy will monitor terms and conditions and prices for other letter services (relative to ordinary letter services), with a view to informing any decision on whether to continue or amend these arrangements prior to the expiry of the new declaration in September 2016.

Appendix A

Description of domestic reserved letter services