The Postal Service today presented a 5-year business plan that it calls a Plan for Profitability. The plan represents the impact of the investment bank Evercore partners and clearly indicates that Evercore was required to develop a plan that maintained the financial and market restrictions of a quasi-governmental Postal Service. Therefore the plan differs significantly from successful plans for profitability of most foreign postal administrations. The two key differences are 1) the plan does not include an infusion of capital, mostly coming from private sector; and 2) the plan does not include the commercial freedom to fully exploit the value of the Postal Service brand or its human, physical or intellectual property assets.
Evercore’s influence appears to have caused the Postal Service to make three changes in its business plan:
- The plan adds a net cash target for the Postal Service. Meeting that cash target is what drives the operating and rate changes proposed.
- The plan includes rate increases for all mail classes. Up till now the Postal Service has been circumspect about the need for increased pricing and appeared to back off on the idea of an exigent rate increase. The price increase headline is a 5 cent increase in single piece First Class mail. However, the proposal includes an exigent rate increase and it appears that the Postal Service may become more aggressive in seeking rate increases in Standard Mail even if rate increases result in lower volumes.
- The Plan includes an aggressive schedule for implementing reductions in service and employee head count. The decision of the Postal Service to implement the Network Optimization Initiative soon after the May 15 moratorium ends represents a clear example of the Postal Service taking an action that will generate substantial political heat that in previous years it would have deferred.
The Plan Depends on Congress Passing Legislation Similar to S. 1789
The plan depends on Congress to make changes in law that do the following:
- Eliminate the Retiree Health Benefit Prefunding and incorporate Medicare into the retiree health benefit package;
- Possibly set up a new retiree health benefit for current employees;
- Allow the Postal Service to withdraw from the federal health benefit program and set up its own benefit plan for employees
- Refund of the overfunding of FERS as identified in the Obama administration budget;
- Permit the Postal Service to eliminate 5-day delivery;
- Allow the Postal Service to implement a 5 cent single piece First Class mail rate increase without Postal Regulatory Commission review;
- Allow the Postal Service to implement a rate increase without proving an exigent circumstances; and
- Allow the Postal Service some modest expansion of the types of services that it can offer.
Most of these changes are included in S. 1789. The Postal Service legislative wish list adds significant price increases that are not included in the bill as it stands. Given that S. 1789 has already generated significant objections due to the service changes that it would allow; adding major increases in prices to the package would not appear to make passage of legislation any more likely.
What the Business Plan Missed because it Stuck With the Government Business Model
This Postal Service business plan, just like all plans that came before, started with the assumption that the Postal Service remains a quasi-governmental entity. As noted in the introductory paragraph, the business plan does not include two key parts of successful business models of foreign business administrations:
- the introduction of private capital; and
- The expansion of the product range that the national post can offer in order to exploit its band and its physical, human and intellectual property assets.
Why Private Capital Would be Interested: Brand, Real Estate and Pension Assets of the Postal Service
The Postal Service has three types of assets that have significant value for private investors. They are the value of its brand, the value of its real estate, and the value of its pension and retiree health benefit assets.
The Postal Service has tried to exploit the value of its brand but current legislation and regulatory decisions do not permit the Postal Service to create brand expansions that would brand products that other entities sell that are clearly linked to the Postal Service’s core services. These services include branded mailing supplies and there maybe others.
The value of real estate is obvious and the conclusion of the Network Optimization Initiative would provide a number of opportunities for real estate development that private sector investors might find quite interesting.
The value of assets associated with CSRS and FERS pensions and the retiree health benefit accounts are less obvious but much larger. Currently both CSRS and FERS accounts hold assets that exceed the expected liability and the excess assets are expected to grow each year for the foreseeable future. The overfunding in these accounts would be even larger if these funds could be invested in the types of assets that are commonly used by private sector pension funds. A privatized Postal Service could then remove some of the assets from these funds to improve its cash position as well as provide a dividend to investors.
A similar benefit could come from investing the retiree health benefit assets in stocks and bonds that are commonly used in the private sector retiree health benefit funds. Combined with a more current estimate of the actual liability for retiree health benefits and expansion of the use of Medicare to cover retiree benefit costs, the new investment policy could shift the retiree health benefit obligation form a severely underfunded status to one that is either fully funded or close to being fully funded.
Private sector management of the retirement benefit assets would provide another benefit to the Postal Service, lower operating costs. With pension plans fully funded, the Postal Service would not have pension expenses and depending on future actuarial analysis may be looking at periodic cash transfers from the pension asset accounts back to corporate accoutns. Private management of retiree health benefit assets, and a lower unfunded liability would significantly reduce annual costs of the retiree health benefits below the levels that the Postal Service has estimated in its new Business Plan.
Combining full access to brand, real estate, and retirement assets provide private investors with the potential of some quick profits while at the same time improving the capital structure of the Postal Service far more than the plan that the Postal Service and Evercore Partners just came up with.
Expansions of the Product Range: How the Quasi-Governmental Model Precludes Significant Revenue Growth
A key part of foreign postal administration’s successes come from their expansion into markets outside physical delivery of written communications. These administrations growth has come in four areas: parcels, communications integration, retail services, and e-communications.
While the Postal Service has delivered parcels for well over 100 years, its parcel business looks much more like a start-up than a mature firm. Competitive parcel volumes are now growing at double digit rates as the Postal Service becomes the core delivery service for home delivery of light weight parcels. This business needs significant capital investments to upgrade Priority Mail Service and expand the goPost parcel lockers. Given that on-line retail sales are expected to grow by 20% or more, the Postal Service’s parcel business could grow faster with proper investments. The business model provides little information about how the Postal Service will get the capital to make the necessary investments in its parcel business and therefore it is unclear if it will be able to grow its parcel business as much as it needs to replace declines in print communications delivery
A less regulated Postal Service would be free to offer services that integrate the last mile delivery into earlier or later steps in the print communications process. For example, the Postal Service could work with billers to improve payment processes by linking sortation of payments with transfers of checks to banks in the city where the mail is originally sorted rather than transporting the letter to the biller’s address. The current business plan does not touch on that subject due to concerns about a government entity competing with the private sector.
The key to retail services is expanding what is offered beyond traditional postal services. Providing other government services is a nice idea but the revenue associated with these services is likely to be insufficient to support the Postal Service’s retail infrastructure. Freeing postal retail outlets to provide the full range of services that Australian retail outlets provide could turn a money losing service into a money maker. A modern retail network would also include contract operations but again making contract operators successful requires the Postal Service to be able to offer retailers more than it can now and the Australian model again provides a good example of what a private investor would want to exploit. The problem with the Australian model is the potential conflict with private sector firms by a government sponsored enterprise.
Electronic communication extensions of the Postal Service’s physical communications services have been the topic of a number of United States Postal Service Inspector General Reports. However, potential competition with the private sector is the largest barrier from the Postal Service offering these services.
With the exception of parcel services, forcing the Postal Service to operate under a quasi-governmental business model creates a conflict with the private sector that precludes the types of brand expansions that are common in successful transformation to a profitable national post outside of the United States. This barrier is a key reason that postal reform legislation allows the Postal Service to expand into services that no firm that lobbies Congress could object too, and therefore services that are unlikely to generate sufficient revenue to make a noticeable difference in the Postal Service’s expected revenue.
Time for Fresh Thinking
The plan prsented yesterday is not much different from one presented two years ago for the simple reason that it continues to work with the assumption that the Postal Service must remain quasi-govenmental entity. As such, the Postal Service’s new business plan illustates the limitations of the government business model and the operating, marketing, and pricing changes all have key opponents among postal stakeholders; The plan offers:
- postal labor little more than massive job losses and reductions in compensation;
- those on the wrong side of digital divide slower service and much higher prices; and
- large volume mailers significant above inflation price increases and reduced service levels.
While any business plan is likely to result in significant unpopular changes, by sticking with the quasi-governmental business model, the Postal Service ensured that the changes are greater than they needed to be.
It is clear that the business plan that the Postal Service has chosen is not the one that has worked in other countries. The plan avoids talking about either private capital or expanding the breadth of service offerings as neither are on the legislative table. Introducing thinking about how private capital could be introduced and the product offerings could be expanded forces stakeholders to think about privatatization, an idea that is nearly as unpopular as the changes that the proposed business model introduced. However, as this brief post notes, privatization offers significant financial advantages that could reduce the operating and price changes envisions by the Postal Service’s business plan. Therefore, those who see the greatest harm from this plan need to see if the advantages of privatization could benefit their interests sufficiently to overcome long-held objections to the idea.