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Return to sender

By Jonathan J. Ariel - posted Thursday, 2 January 2014


Canberra's antiquated policies, combined with rising internet use, are killing Australia Post. Or so Australia Post wants you to believe.

True, letter volumes in aggregate are down over 19 percent since 2008, and yes, the decline is most pronounced in the non-business, non-government so-called "individual" sector, which has collapsed by 29 percent.

But tellingly it is the composition of the mail that has changed dramatically. Most mail is now business-originated commercial (or as consumers see it, "junk") material.

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Australia Post's Community Service Obligation's catch cry of being "reasonably accessible to all Australians" (see Section 27 of the Australian Postal Corporation Act 1989) is just about obsolete when individuals around the country, or for that matter, around the world these days communicate instantly and cheaply via the internet, and receive mostly shopping catalogues and corporate (or political) promotion by post.

To ram home the message that things are dire at Australia Post, on Thusday the ABC reported that the corporation said it needed to lift the price of stamps by at least 10 cents next year if it is to reduce the size of its losses.

The postal service says that as letter volumes have ebbed worldwide it is no longer financially sustainable to continue holding prices below inflationary levels. (This of course assumes that its pre-inflationary starting price was fair and not unjustly high).

In its submission to a Senate Committee, Australia Post says inflation has galloped by 70 per cent during the past 20 years while postage stamps price rises have only cantered by about 30 per cent and that its letter business has spilt $400 million of red ink over the past three years.

Without knowing anything else, the reader – as Australia Post no doubt hopes – could realistically conclude that Australia Post is losing money. As an aside, is that such a bad thing? After all, it is a government organization charged with a community service obligation?

But the fact is Australia Post is indeed, making money. Yes Sir. Making money. In spades.

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While the business of carting letters has tanked, resulting in a trading loss on that product of $147 million for the year, overall the postal monopolist raked up a consolidated net profit in 2012-13 of $312 million.

Hmmm.

Even if we agree that standard letter delivery should be a function (perhaps even a loss making one) of Australia Post, a host of questions still come to mind that must be asked by the Senate inquiry currently underway and due to report by the end of March.

  1. Assuming society decides that some uneconomic postal routes are worthy of direct taxpayer subsidy, what is the cheapest and most transparent way to pay that subsidy? Taxpayers have a right to know exactly how much a guaranteed mail service is costing them, which of course is a function (amongst other things) of the distance the mail has to travel. Also taxpayers want assurances that they are paying the minimum amount necessary for such service;

  2. What level (such as number of days per week) of guaranteed mail delivery is appropriate in today's world? For instance, would society accept no price rise for letters in return for say, a 4 day per week delivery schedule?

  3. To what extent has Australia Post focussed on cost control, including lowering its staff numbers and trimming the pay of its workers? Here's an idea: has it considered shaving the obscene compensation of its chief, Ahmed Fahour who at $4.8 million is paid 130 times his United States Postal Service counterpart (when calculated by remuneration paid divided by population served)? For the record, Fahour in 2012-13 was paid nominally 9.4 times what Patrick R. Donahoe, the head of the United States Postal Service, an organisation breathtakingly bigger than Australia Post. USPS delivered 160 billion items of mail in 2012, employing 630,000 and serving 317 million Americans. To oversee that empire, Donahoe was paid a princely $512,000. And he gets a heck of a lot of grief from Congressmen for pulling in such a paycheque. Kind of slots us into the Bozo-the-Clown school of public remuneration, doesn't it?

  4. Has Australia Post looked at contracting out more services?

  5. Breaking Australia Post into smaller units?

  6. Considered hiring management consultants or senior executives from ivory towers other than Boston Consulting Group and the NAB from where Fahour and some other executives have earned their stripes?

  7. Will the Productivity Commission be asked to consider the costs and benefits of lifting in part or in full the regulations that prohibit letters from being delivered by anyone but Australia Post?

Let's say that most Australians conclude that letter delivery is a natural monopoly and needs the government to guarantee universal delivery, no matter where in this far-flung land someone lives. A fair question that could arise is whether those living in areas where the cost of delivery is high should be made to contribute more to the cost of that delivery.

Where Melbourne to Sydney mail say retails for $0.60 per letter, maybe mail from Melbourne to Broome should rise to $1.35 and mail within Melbourne should fall to $0.30?

The comparison that should be drawn by critics of such a proposed change in prices (however moderate) is not to compare what they are paying now with what many would consider is fair for Australia Post to charge for such a service, but to compare what they are paying now to what a privatised Australia Post will fleece them.

The time has come for meaningful reform that will create a sustainable postal service.

Given our village like economy, where monopolies or oligopolies are the rule and not the exception, arguments for privatisation of Australia Post are little more than wish lists of special interests. And while they have little merit, I am sure they will be made.

There are many destinations that the Senate can arrive at when considering the future of Australia Post. But one is more attractive than most others.

Assuming a national resolve to keep universal letter delivery countrywide affordable - even if that means both small price falls on some routes and moderate price rises on other routes - an imperative must be to build Australia Post into a robust competitor in a range of marketplaces.

The recent sale by Wesfarmers of its insurance division to IAG only serves to underline this urgency as that sale merely further consolidated an already concentrated market. With zero public benefit.

Why not allow Australia Post to partner with a global insurer to offer home, contents and motor vehicle policies? After all, it has the most important ingredients already: wide distribution points and a very recognisable brand. Or for that matter, partner with a foreign bank or with Apple Inc or Google Inc to offer financial products?

Such money-spinners will perform two necessary functions.

First, Australia Post's serious entry into the financial services space will upset the rent-seeking oligopolists currently carving the respective sub-markets for themselves, sheltered as they are from the harsh winds of competition. A large player like Australia Post will have a moderating influence on existing industry players' desire for price rises.

Secondly, equally vital, the profits from these commercial activities could more than offset the losses suffered from the standard letter delivery service without the need for a price rise in stamps, for many years to come.

Let's hope the Senators in their report due on 31 March manage to put the public interest ahead of special interests.

For starters, can they justify to the taxpaying owners of Australia Post why Mr Fahour's compensation is as obscene as it is?

I for one am Ahmed as hell.

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About the Author

Jonathan J. Ariel is an economist and financial analyst. He holds a MBA from the Australian Graduate School of Management. He can be contacted at jonathan@chinamail.com.

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