“Study About the Economics of Postal Services”
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ECONOMICS OF POSTAL SERVICES: Ref. Ares(2015)5322260 - 24/11/2015 FINAL REPORT A Report to the European Commission DG-MARKT Prepared by NERA July 2004 London The views and opinions expressed in this study are those of the authors and do not necessarily reflect the position of the European Commission Project Team John Dodgson José Maria Rodriguez Jan Peter van der Veer Stephen Gibson Juan Hernandez Barbara Veronese 15 Stratford Place, London W1C 1BE, UK Pº de la Castellana 13, 28046 Madrid, Spain Tel: (+44) 20 7659 8500 Tel: (+34) 91 521 0020 Fax: (+44) 20 7659 8501 Fax: (+34) 91 521 7876 Web: http://www.nera.com An MMC Company ACKNOWLEDGEMENTS NERA wishes to thank all the postal operators and other organisations which assisted in this study by completing our questionnaires or responding to specific questions. We alone are responsible for the contents of this report. TABLE OF CONTENTS EXECUTIVE SUMMARY i 1. INTRODUCTION 1 1.1. This Report 1 1.2. Our Terms of Reference 1 1.3. Coverage of the Study 3 1.4. Structure of the Rest of this Report 3 2. OUR APPROACH 5 2.1. Methodology 5 2.2. Information Sources 7 3. THE CHANGING NATURE OF POSTAL PROVISION 9 3.1. Introduction 9 3.2. Services Provided by Universal Service Providers 10 3.3. The Traditional Postal Value Chain 11 3.4. Parcels and Express Services 26 3.5. Conclusions 30 4. DEVELOPING POSTAL BUSINESS STRATEGIES 33 4.1. Introduction 33 4.2. The External Context that Operators Face 34 4.3. Strategies Adopted by Postal Operators 39 4.4. A Typology of Postal Operators 49 4.5. Conclusion: Impact of Strategy on the Economics of Postal Services 55 5. POSTAL COSTS IN EUROPE 59 5.1. Introduction 59 5.2. Availability of Cost Information in the Postal Sector 60 5.3. Total Cost Levels 62 5.4. Categories of Cost: Labour; Depreciation; Materials etc 66 5.5. Unit Labour Costs 68 5.6. Costs in the Postal Value Chain 71 5.7. The Costs of Different Types of Traffic 73 5.8. Costs of Parcels and Express Services 75 5.9. Conclusions: Information on Postal Costs 79 6. AN INITIAL VIEW OF THE DETERMINANTS OF POSTAL COSTS 81 6.1. Introduction 81 6.2. Economies of Scale, Density and Scope 81 6.3. Unit Costs and Demographic Factors 87 6.4. Unit Costs and Postal Infrastructure 90 6.5. The Impact of Universal Service Obligations 93 6.6. The Impact of Quality of Service Requirements 96 6.7. Conclusions: Summary of the Initial Review of Cost Drivers 97 7. THE ECONOMETRIC APPROACH TO ASSESSING COST CAUSALITY 99 7.1. An Introduction to the Econometric Approach 99 7.2. A Review of Previous Econometric Studies of the Postal Sector 100 7.3. Conclusions 114 8. ESTIMATION OF A EUROPEAN POSTAL COST FUNCTION 117 8.1. Introduction 117 8.2. Data 118 8.3. Total Cost Function 121 8.4. Collection Cost Function 128 8.5. Sorting Cost Function 130 8.6. Transport Cost Function 131 8.7. Delivery Cost Function 133 8.8. Conclusions 134 9. POST OFFICE RETAIL NETWORKS 135 9.1. Introduction 135 9.2. Functions of the Retail Network 135 9.3. Constraints on Changing the Retail Network 136 9.4. The Network of Retail Post Offices 138 9.5. Changes in the Provision of Post Office Services 139 9.6. Non-Postal Services Provided by Retail Post Offices 144 9.7. Selling Postal Banks 146 9.8. The Cost of the Retail Post Office Network 147 9.9. Conclusions 147 10. CONCLUSIONS: THE ECONOMICS OF POSTAL SERVICES 149 10.1. Introduction 149 10.2. The Aims of the Study 150 10.3. The Evidence on Costs in the Postal Sector 151 10.4. Implications for the Development of Competition 155 10.5. The Role of Retail Networks 158 10.6. The Dynamic Development of the Industry 159 REFERENCES 163 LIST OF TABLES Table 3.1 Number of Post Boxes per Square Km 13 Table 3.2 Per Cent of Mail Handled by Automatic Machinery for Universal Service Providers 17 Table 3.3 Number of Sorting Offices of Universal Service Providers 19 Table 3.4 Percentage of Mail by Primary Transport Mode for Universal Service Providers, 1998-2003 23 Table 3.5 Number of Delivery Offices of Universal Service Providers 25 Table 4.1 TPG Cost Flexibilisation Programme 47 Table 5.1 Availability of Information on Costs by Type of Business 61 Table 5.2 Availability of Information on Costs by Type of Activity 62 Table 5.3 Total Operating Costs for Universal Service Providers 63 Table 5.4 Unit Costs for Universal Service Providers 64 Table 5.5 Annual Average Labour Costs for Universal Service Providers 69 Table 5.6 Components of Labour Costs for Selected Countries, 2002 70 Table 5.7 Cost Splits by Activity in Letter Mail for Universal Service Providers 72 Table 5.8 Avoidable Cost by Type of Traffic, Royal Mail 73 Table 5.9 Avoidable Cost by Size or Format of Item, Royal Mail 74 Table 5.10 Avoidable Cost by Delivery Distance, Royal Mail 74 Table 5.11 Avoidable Cost by Density of Delivery Area, Royal Mail 75 Table 5.12 Avoidable Cost by Type of Recipient, Royal Mail 75 Table 5.13 Cost Splits by Cost Components in Parcels 76 Table 5.14 Cost Splits by Activity in Parcels 77 Table 5.15 Comparison of Splits of Costs between Activities between Parcels and Letters 78 Table 5.16 Cost Shares in Mails and Express Compared, Deutsche Post, 2003 79 Table 7.1 Evidence of Economies of Scale in the Delivery Activity 101 Table 7.2 Degree of Economies of Scope Between Products in the Delivery Activity 104 Table 7.3 Index of Average Cost for La Poste and USPS in 1999 107 Table 7.4 Cost Elasticity with Respect to Density of Delivery Points per Square Km 108 Table 7.5 Cost Elasticity with Respect to Grouping Index 108 Table 7.6 Important Factors Determining Operating Efficiency (OE) at Mail Processing Centres 109 Table 7.7 Ratios of Marginal Costs with Respect to the Standard Size Letters 111 Table 7.8 Cost Savings from Reducing Delivery Days on Non-Business Routes 111 Table 7.9 Cost of Delivery Frequency ($ Billion 1993) 112 Table 8.1 Total Cost Function (Specification including the Number of Households and the Percentage Urban Population) 123 Table 8.2 Total Cost Function (Specification including the Number of Households, Percentage of the Urban Population and Dummies on D+1 Variables) 127 Table 8.3 Unit Cost Function 128 Table 8.4 Collection Cost Function 129 Table 8.5 Sorting Cost Function 130 Table 8.6 Transport Cost Function 132 Table 8.7: Delivery Cost Function 133 Table 9.1 Regulatory Requirements for Retail Networks 137 Table 9.2 Number of Post Offices and Network Density 139 Table 9.3 Percentage of Post Offices Run by Franchises/Third Parties 141 Table 9.4 Use of Retail Network for the Provision of Non-Postal Services 145 Table 9.5 Estimated Costs of Establishing a Post Office Franchise (£) 147 LIST OF FIGURES Figure 1.1 Postal Service Provision Structural Overview 2 Figure 1.2 Aggregate Cost Inter-Relationships 2 Figure 1.3 Micro Value Chain Cost Inter-Relationships 2 Figure 2.1 Project Timetable 7 Figure 3.1 The Postal Value Chain 11 Figure 4.1 The “Extended Value Chain” 40 Figure 4.2 Combined Extended Value Chain 42 Figure 4.3 Typology of Postal Operators 51 Figure 4.4 Direction of Future Developments 53 Figure 4.5 Summary of the Impacts of Business Strategies on the Economics of Postal Services 57 Figure 5.1 Total Letter/Parcels Costs and Mail Volumes, 1998-2003 65 Figure 5.2 Changes in Letter/Parcels Costs and Changes in Mail Volumes 66 Figure 5.3 Labour Cost as Percentages of Total Costs by Operator, 2002 67 Figure 5.4 Depreciation/Amortisation Costs as Percentages of Total Costs by Operator, 2002 68 Figure 5.5 Changes in Letter/Parcels Costs and Changes in Average Wage 71 Figure 6.1 Economies of Density and Constant Returns to Scale 83 Figure 6.2 Unit Costs v. Letter Mail Volume 84 Figure 6.3 Unit Costs v. Mail Volume per Household 85 Figure 6.4 Volume Per Pure Sorting Office v. Volume Per Household 86 Figure 6.5 Volume Per Delivery Office v. Volume Per Household 86 Figure 6.6 Volume Per Post Box v. Volume Per Household 87 Figure 6.7 Delivery as a Proportion of Total Costs v. Percentage Urban Population 88 Figure 6.8 Unit Costs v. Population Density 89 Figure 6.9 Unit Costs v. % Urban Population 90 Figure 6.10 Unit Costs v. Volume Per "Pure" Sorting Office 91 Figure 6.11 Unit Costs v. Volume Per Delivery Office 91 Figure 6.12 Unit Costs v. Volume Per Post Box 92 Figure 6.13 Unit Costs v. Mail Handled by Automatic Machine 93 Figure 6.14 Unit Costs v. Delivery Practice 94 Figure 6.15 Delivery as a Proportion of Total Costs v. Delivery Practice 95 Figure 6.16 Unit Costs v. Access Requirements 96 Figure 6.17 Unit Costs v. Quality of Service 97 Executive Summary EXECUTIVE SUMMARY Objectives of the Study 1. This is the report of a study conducted by NERA Economic Consulting for the European Commission. The aim of the study was to provide for a fuller shared understanding of the economics of postal services, in particular of the scale and nature of the costs inherent in postal provision and about the different ways postal operators in the Member States have developed their business organisation and strategy.