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POSITION PAPER

The ECORYS Study on “Development of competition in the European postal sector”

22 March 2006

PostEurop, the Association of 43 Postal Operators, holders of the Universal Service Obligation at national as well as at international level, through its Postal Directive Working Group, has followed with attention the progress and the outcome of the Study performed by ECORYS for the European Commission (DG Markt) titled : “The development of competition in the European postal sector”1. The Study has been made public in mid-August 2005. The European Commission hosted a workshop on 10 October 2005 during which ECORYS described the main results of its study.

PostEurop has already taken the opportunity to issue its opinions on the progress of the ECORYS study and refers therefore to its existing Opinion Paper of 15 June 20052. Following the invitation of the European Commission, PostEurop is pleased to have the opportunity to convey the following position observations in order to positively contribute to the further definition of Community postal policy.

1. GENERAL REMARKS

At first sight the study provides a fresh view on current developments within the European postal sector as well as its (possible) future. The report’s uniqueness lies in the fact that it combines up-to- date knowledge of postal companies, their processes, the markets they serve, current and potential competitive forces, strategic options and the impact of liberalisation to draw a picture of the possible future of the European postal sector. ECORYS is considering the development of competition on the upstream markets as an indicator of the overall process of liberalisation.

If we take a closer look, it appears that the authors have succeeded in developing a coherent, well- balanced view out of these elements. This view can be considered quite realistic as far as it concerns current market developments and strategic options of the main postal operators. What is explicitly left out of the view is the potential influence of both European and national future regulatory models, which could shape further developments of the postal markets to a large extent. The report does recognise the importance of this influence. Although an in-depth analysis of the regulatory model for the future postal market is outside the scope of the study as proposed by the European Commission, ECORYS expresses some clear recommendations about regulation (see particularly point 7.3.2). In our opinion, as these recommendations are based on ECORYS’ very comprehensive study of the prospects for competition in the European postal market, the Commission should treat them as valuable input to the development of the regulation of the European postal market in the near future. We also take this opportunity to express that we consider it a shortcoming of the way the European Commission organised the studies, that the market and the regulatory model have been studied separately without creating a synthesis. In our view it is this synthesis that is needed to create the type of regulation that suits and serves the European postal sector in the near future.

1 Available on http://europa.eu.int/comm/internal_market/post/news_en.htm 2Opinion paper of PostEurop, 15 June 2005, available on www.posteurop.org

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2. MAIN COMMENTS

In order to provide our main comments in a concise way, we have chosen to take chapter 7, which summarises the main findings, conclusions and recommendations, as a guideline.

7.2.1 Postal products and market segmentation

Definitions and segmentation dimensions presented in this section are clear enough and close to the current practice in the postal sector.

7.2.2 Liberalisation of postal markets until date

No comments on this section.

7.2.4 Strategies of postal operators

A very important notion is presented in this section, namely that in the postal sector “sufficient economies of density can be obtained as long as the network size is kept relatively small”. It should also be added that there is room for competing business models that exploit the economies of scope that exist in the postal sector. For e.g. in Germany we see that existing newspaper delivery networks show interest in also delivering mail. This underpins the economic fact that economies of scale do not hamper the development of competition in the postal sector.

7.2.5 Key factors influencing the development of competition until date

Natural barriers to entry In this section the authors clarify that from the demand side in the postal market there is no insurmountable entry barrier. Furthermore they state that there are no considerable economies of scale nor sunk costs on the supply side. The only entry barrier that has some importance consists of economies of density. However, as argued in 7.2.3, this barrier can be surmounted by competitors with a relatively small network size.

Legal barriers to entry The report correctly argues that the reserved area currently is the main legal barrier to entry. It then continues to illustrate that partly liberalised markets suffer, to a lesser degree, from the same type of barrier. In doing so, the authors make a wrong assumption and mix up two different things at the same time. We reject the assumption that it would be difficult to build a nation wide B2C delivery network in the liberalised market segment of one third of the addressed mail volumes in the UK. Furthermore, we note that the authors mix up this assumed difficulty with the notion that competitors would have sought access to the delivery network of Royal Mail.

First, let us state that competitors did not seek access in the first place. To the contrary, Postcomm created the opportunity to do so. As a consequence, the UK regulatory model allows for both end to end operation but it may be argued that it favours access. This has created clarity, as access operators know the charges to be levied by Royal Mail but dampens network development, as this dual approach may inhibit if not prevent competitors from setting up their own delivery networks.

Second, we would not consider one third of the UK addressed mail volumes to be insufficient market size to build a profitable delivery network.

Finally, the current state of play in some countries illustrates that “end-to end” competition is possible without entry barriers. Some examples thereof are : Sweden (Citymail), The Netherlands (Sandd), France (Adrexo) and Spain (Unipost).

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Absence of a level playing field PostEurop notes that ECORYS focuses on the VAT exemptions for some incumbent postal operators applied to postal services outside the reserved area. PostEurop will follow closely the evolution on this item (the European Commission’s proposal directive with respect to VAT on postal services).

7.2.6 Expected pattern of competitive entry in a liberalised environment

This section starts by stating that the main drivers for competition “…will no longer be strongly influenced by the regulatory framework...”. We think this remains to be seen. For instance, if an ex ante access regime is put in place, this would strongly affect competition in the postal market.

Remarkably, in the sixth paragraph of this section, the authors illustrate our point by putting forward the following:

“Favourable access conditions will in general delay the development of low cost delivery models, in particular if such access is possible at the time that no parallel delivery networks for addressed mail delivery have (yet) been developed. Although some value added will be lost for in potential substantial mail volumes, these models may be less threatening to the national postal operator (as final delivery is more likely retained) then the low cost models, depending on the anticipated impact of these low cost models on the market share of the national postal operator and revenues.”

In our view, this is a long-winded wording to say that access does not create real competition.

7.2.7 Expected scale of competitive entry in a liberalised environment

Here again, the authors illustrate that they explicitly disregard the potential influence of both European and national future regulatory models, which could shape further development of the postal markets to a large extent. With this exception, it is our opinion that this section gives a reasonable description of the scale of entry in the European postal market in the near future.

7.2.8 Entry, contestability and effect of liberalisation on market structure

In this section ECORYS states, more explicitly this time, that the regulatory access model in the UK will probably prevent potential competitors to build their own delivery networks:

“The choice for relatively favourable access conditions in the UK will most likely deter the development of a parallel delivery network and the emergence of low cost operators.”

PostEurop shares this opinion.

Furthermore, ECORYS predicts that future national postal markets will resemble oligopolies with market shares of the national postal operators between 60 and 90%.

PostEurop would however like to stress that the measure of the traditional national market is becoming increasingly less relevant as the customers are becoming more international. We therefore believe that we in the medium and long term will see postal companies, some of which will be former PPOs, competing on a regional and pan-European scale. Thus we do not share ECORYS’ opinion about the future market being of an oligopolistic nature.

7.2.9. Likely effect of liberalisation on market performance

At the end of this section, the report puts forward two important views on the interrelationships between the scope of the universal service on one hand, and funding and market demand on the other hand.

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It is logical and relevant to state that the funding of the universal service correlates with its scope. A limited scope might diminish the potential funding problem but may not exclude that some postal operators will, as a consequence, face financial losses.

The current scope of the universal service veils the underlying market demand. Only after full liberalisation will it become clear what the real size is of, for instance, the 24-hour delivery segment. When customers get more choice, they will behave differently.

7.3.1 Overall conclusion

This section presents an argument, which counters the proposal made by WIK in its recent parallel study.

WIK states that NRA’s should identify market dominant postal operators and make specific determinations in respect to market dominant products. Furthermore, they state that, where the postal operator is unwilling to meet regulatory guidelines, the NRA must have reserve authority to determine the final solution.

By contrast, ECORYS states the following:

“It is hence likely that in the largest part of the letter mail market effective competition will emerge within a couple of years after liberalisation, even if the national postal operator will maintain a dominant market position in the addressed mail market.”

In other words, ECORYS argues that the proposal made by WIK will turn out to be redundant In addition, ECORYS acknowledges, like WIK does, that effective competition will not emerge automatically. However, ECORYS presents a different, almost opposite solution to this:

“... the development of competition should be actively nurtured and supported in various ways. This should in our view be done primarily through creating a level playing field and not by favouring certain postal operators over others.”

PostEurop shares ECORYS’ analysis as referred to above.

7.3.2 Recommendations

ECORYS concludes its report with a number of most sensible recommendations, which appear to be based on the following main principles:

• Light regulation creates the best conditions for development of effective competition • An adequate scope of the USO will remain necessary in order to safeguard basic postal services for everyone after full liberalisation • Reduce regulatory uncertainty in order to stimulate competition • Establish non-discrimination and transparency as main regulatory guidelines • Create solutions for some operational problems like access to P.O. Boxes, and return mail whenever applicable and desirable • Network competition is the best route to go • Non-discrimination and transparency are preferable to ex ante access regulation • In general, ex ante regulation of competition should be considered a matter of last resort

PostEurop has already taken the opportunity to comment on most of these statements through its Opinion paper on the second application report and its Comments paper on the WIK study with respect to the regulatory model3.

3 Papers of PostEurop available on www.posteurop.org

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This position paper is supported by the following Postal Operators: Österreischiche Post AG (Austria), La Poste/De Post (Belgium), Department of Postal services (Cyprus), Post Danmark (Denmark), Eesti Post Ltd. (Estonia), Finland Post Corporation (Finland), La Poste (France), Deutsche Post World Net (Germany), ELTA (Greece), Íslandspóstur hf (Iceland), An Post (Ireland), Latvijas Pasts (Latvia), Lietuvos paštas plc. (Lithuania), P&T Luxembourg (Luxembourg), Maltapost plc. (Malta), TNT N.V. (The Netherlands), Posten Norge AS (Norway), CTT - Correios de Portugal S.A. (Portugal), Slovenská posta, a.s. (Slovak Republic), Sociedad Estatal "Correos y Telégrafos" S.A. (Spain), Posten AB (Sweden).

PostEurop, A.I.S.B.L., Avenue du Bourget 44 – B-1130 Brussels – Belgium Tel: +322 724 72 80 – Fax: +322 726 30 08 – www.posteurop.org