Main Developments in the Postal Sector (2010–2013) A study for DG Internal Market

Third Public Workshop

Alex Kalevi Dieke James I Campbell Jr. Antonia Niederprüm

Brussels, 17 September 2013 0

1 Introduction

Table of contents Executive Summary Chapter 1. Introduction Chapter 2. Regulatory Developments Chapter 3. Market and Economic Developments Chapter 4. Analysis of Main Developments and Implications for Future Postal Policy Chapter 5. Recommendations

Appendix: Country reports

345 pages 1

1 Introduction

Objectives of the study  To allow the Commission to make an informed assessment of the developments in the postal sector in the period 2010-2013 in preparation for the Fifth Application Report.

 To place recent developments in the larger context of European postal reform and the changing nature of the postal sector.  To suggest options for policy makers for further modernisation of the EU postal policy and its regulatory framework for postal services  Geographic coverage: EU-28, non-EU EEA MS (Iceland, Lichtenstein, Norway), and Switzerland (32 countries).

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2 Regulatory developments Contents 2.1 Legal and regulatory framework

2.2 Market opening and potential restraints on competition 2.3 Application of the competition rules 2.4 Regulation of cross border services 2.5 Universal postal service

 Status of regulation in the EU-28 as of mid-2013.  Based on WIK survey, desk research (esp. prior studies for DG Market, ERGP reports, law and legal cases), and interviews.  156 pages This presentation can provide highlights only.

2.6 Protection of users

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2.1 Legal and regulatory framework (1)  Transposition of Third Postal Directive: Cyprus and Romania not yet completed.  Governance issues of concern in some MS

 Separation of policymaking from regulation and ownership of PPO.  NRA authority over decisions requiring impartial, objective resolution.  National regulatory authorities (NRAs)  Comprehensive reorganization in ES, NL, UK.  Independence: organisation could be strengthened in some cases.

 Resources: could be strengthened in about half MS.  Enforcement authority: 10 NRAs can levy significant fines or issue remedial orders and fines and seek court enforcement. 4

2.1 Legal and regulatory framework (2)  Article 22a: Collection of compliance and statistical data from all operators  Compliance: ‘to ensure conformity with the provisions of, or decisions made in accordance with this Directive’ and  Statistics: ‘for clearly defined statistical purposes’.  Compliance data: Most MS can and do collect such data, although there are some gaps, especially in respect to (limited) data from non-USPs.  Market statistics:  NRAs have not always defined statistical purposes.  Collection of market data is uneven, especially from non-USPs, and inconsistent among MS.

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2.2 Potential restraints on competition (1)  Value Added Tax: The unequal application of VAT to public and private operators and among MS creates significant distortions in postal sector.

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2.2 Potential restraints on competition (2)  Significant recent VAT developments include:  CJEU 2009: TNT Post UK Case

 2010-11: UK and DE change VAT law  Dec 2012. UK court approves 2d question to CJEU.  Dec 2012-Jan 2013. Studies by ERGP, Copenhagen Economics  VAT exemption is inconsistent with goals of Postal Directive, in particular Art. 7(1) (special rights).  Conclusion: the manner in which the legal tension between the Sixth VAT Directive and the Postal Directive is resolved could have profound implications for the liberalisation of postal services.

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2.2 Potential restraints on competition (3)  Customs and security procedures  Current EU law supports preferential application of the UPU-based customs procedures and immunities for USPs distort competition in the postal sector.  Modernised Customs Code omits special customs rules for USPs.  NRAs are generally not informed about UPU and customs rules.  Based on review of USPS requirements, all EU/EEA MS apply UPU customs procedures to all USP shipments (letter post, parcel, EMS).

 Other topics reviewed: authorisation procedures and conditions, access to postal infrastructure, access to special tariffs, employment laws for postal sector.

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2.3 Application of the competition rules (1)  Abuse of dominant position (21 NCA cases)  Main offenses: rebates, refusal to deal (e.g., access to post office boxes), price squeeze, price-fixing, exclusive dealing (collection/delivery outlets).  Merger decisions (2 cases before the Commission)  Ascendia: French/Swiss post int’l mail venture OK’d with conditions (2012).  UPS-TNT: Prohibition of acquisition of TNT by UPS (Jan 2013) due to reduction in competition in cross-border package services in 15 MS.  State aids (11 cases by the Commission)  Main issues: compensation for cost of a SGEI; compensation for excessive cost of legacy pensions; debt guarantees.  Goal: to ensure level playing field while permitting modernisation of USP. 9

2.3 Application of the competition rules (2)  CJEU decision in Post Danmark v Konkurrencerådet, C-209/10 (2012).  Facts: Selective and discriminatory rebates for unaddressed mail to large supermarket groups. Price is above Average Incremental Cost and below Average Total Cost. No predatory intent demonstrated.  Danish NCA (2004) condemned Post Danmark. Confirmed by Danish Competition Appeals Tribunal and Eastern Regional Court.  On question from Danish Supreme Court, CJEU decided that - Selective above-cost pricing is not prohibited per se. - It must be shown that such pricing policy produces an actual or likely exclusionary effect and is without objective justification.

- CJEU endorsed the effect-based approach proposed by the 2009 Commission Article 102 TFEU Guidance Paper. 10

2.4 Regulation of cross border services (1)  NRAs generally are uncertain or uninformed about:  Relationship between EU and UPU law.

 Prices, costs, and volumes of cross-border postal services.  NRAs have not ensured that terminal dues for cross-border universal services are consistent with the principles of the Postal Directive.  Terminal dues are not cost-oriented or transparent in most cases.  Terminal dues discriminate among users in several respects - Domestic users and cross-border users are treated differently. - Cross-border users from different MS are treated differently. - USPs (‘designated operators) and private operators are treated differently. 11

2.4 Regulation of cross border services (2)  UPU provisions relating to terminal dues appear to be incompatible with EU competition rules. 1. UPU terminal dues and inward land rate provisions appear to constitute a price-fixing agreement which causes significant distortions in trade between Member States in violation of Art. 101(1) TFEU. 2. UPU terminal dues agreements appear unable to qualify for the public interest exception under Art. 101(3) TFEU. 3. UPU measures to constrain bypass competition (ETOEs, remail) appear to constitute an abuse of dominant position in violation of Art. 102 TFEU.

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2.4 Regulation of cross border services (3) Terminal dues per kilogram of average ‘small packet’ - 2014 16

14

Terminal dues in SDR

12

10

1) Differences between domestic postage (blue) and UPU TDs (green) show level of discrimination between domestic and cross border users. 2) Differences in TDs and cross-borders volumes between different MS create benefits for some MS and net costs of other MS.

8

6

4

3) Distortions are worse for small packets than for letters and flats.

2

0

IL

NZ

IS

CA LU NL GR PT ES AT BE JP

POC Rev

FR DE GB US

POC No floor/cap

IE DK SE AU IT NO CH FI

Domestic postage

13

2.4 Regulation of cross border services (4) Very approximate illustrative estimates of distortions that could result from the application of UPU terminal dues in the exchange of letter post items among industrialised countries (UPU Group 1.1).

2014

2017

Average discount from domestic postage for letter post

-37%

-37%

Average discount from domestic postage for small packets only

-50%

-49%

Total domestic postage charge for letter post (mil. euros)

2,333

2,962

Total UPU terminal dues charge for letter post (mil. euros)

1,465

1,872

Total distortion in market (mil. euros)

868

1,090

Total wealth transfer from losers to winners (mil. euros)

308

413

NB: Preliminary estimates only.

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2.5 Universal postal service (1) Postal Services Ensured as Universal Services, 2013 (NRA)

Blue fill = universal service according to NRA. Blue fill with shading = USP disagrees with NRA designation as universal service. White space with shading = USP considers the service to be universal service even though the NRA does not.

Basic letter Bulk letters Direct mail Periodicals Non-priority Basic parcel Bulk parcels post (FSC) letter post post AT BE BG CY CZ DE DK EE EL ES FI FR HR HU IE IT LT LU LV MT NL PL PT RO SE SI SK UK IS NO CH

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2.5 Universal postal service (2)  With more competition and fewer letters, MS appear to be moving gradually to limiting the scope of universal services to fewer types of services.  Most MS have designated the public postal operator as the USP for the entire national territory without the objective, proportional, and non-discriminatory consideration of alternatives required by the Postal Directive.  There is an emerging consensus that the ‘profitability cost approach’ is the appropriate method for estimating the net cost of the USO, but there are few estimates to date.  MS that provide financial support for universal services do so almost exclusively using general tax revenues rather than compensation funds.  Regulation of tariffs and accounts varies widely among NRAs and does not always fully implement the requirements of the Postal Directive. 16

2.6 Protection of users  In almost all Member States the NRA protects users’ rights, often acting in conjunction with the national consumer protection agency (NCPA).  16 MS authorise both the NRA and NCPA to enforce user protections in the postal sector.  Publication of annual complaint statistics is provided by the USP (17) or the NRA (12) in most MS; but there is no publication of complaint data in a few MS.  Almost all Member States have appointed a competent national authority to review users’ complaints that have not been satisfactory resolved by the USP.  In 3 MS, it is an ombudsman or a similar body rather than the NRA.  In the future, sectoral dispute resolution procedures may be supplanted by recent EU legislation on alternative and online dispute resolution.

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3 Market and economic developments Contents 3.1 Sector overview

3.2 Letter post markets 3.3 Parcel and express markets 3.4 Employment in the postal sector

 Status of market and economic developments in the EU-28 as of mid-2013.  Based on WIK survey, desk research (esp. annual reports, market surveys, price lists, press), and interviews.

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3.1 Sector overview (1)

The European postal sector:

2011 EUR 91 billion

2007 EUR 94 billion

Letter post 56%

Letter post 48%

Parcel & express 44%

Parcel & express 52% Sources: WIK survey and WIK research (for letter post); A.T.Kearney for parcel & express

Source: ITA/WIK (2009)

Parcel & express (bn items

Letter post (bn items) 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0

120

100 80 60 40 20

0 2007

2011

2008

2011

Sources: ITA/WIK (2009), WIK survey and WIK Research, A.T. Kearney (parcel & express volume 2008)

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3.1 Sector overview (2) Letter post revenue (bn EUR)

Letter post volume (bn items) 60

120

50

100 -4.3% p.a.

97.1

80

85.0

60

-3.3%

82.2

52.3

40

-5.2% p.a.

44.6

-1.4%

44.0

30

40

20

20

10 0

0 2007

2010

2007

2011

2010

2011

Sources: ITA/WIK (2009), WIK survey and WIK Research

Letter post items per capita

Parcels per capita

300 250

25 20

252

20

200

15

150

163

100 50

0

13

10

5

82

5

50

2

0 Western Southern Eastern countries countries countries

EU-28 average

Western Southern Eastern countries countries countries

EU-28 average

Source: WIK survey and WIK research

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3.2 Letter post markets (1) Demand Letter post items per capita 600

 Letters (individualized correspondence) are most affected.

500

400

 Mixed expectations with regard to direct mail.

300

 Periodicals: Continuous but less decline compared to letters expected.

 Pessimistic outlook particularly for letters.

200

100

0 AT BE DE DK FR FI IE LU NL SE UK IS LI NOCHCY EL ES IT MT PT BG CZ EE HRHU LT LV PL RO SI SK

Western countries

Southern countries

2007

Eastern countries

2011 Source: WIK survey and WIK research

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3.2 Letter post markets (2) Competition  Highly concentrated letter post markets.  Little progress in end-to-end competition, particularly in Western countries.  Conditions are not attractive for market entry in many Western and Southern countries.  Emerging competition in many Eastern countries: important to promote growth in their relatively underdeveloped letter post markets. Competitors' market share developments

Domestic letter post markets: TOP 3 and USPs (revenue shares) 100%

20%

95%

18%

90%

16%

85%

14%

80%

12%

75%

10%

70%

8%

65%

6%

60%

4%

55%

2%

50% AT BE DE DK FI FR IE NL SE UK IS NO CH CY EL ES IT MT PT BG EE HR HU LT PL RO SI SK Western countries

Southern countries

TOP3 postal service providers

0%

Eastern countries

USP market share

2008

2009 DE

ES

2010 IT

NL

PL

2011 SE

Source: WIK survey and WIK research

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3.2 Letter post markets (3) Financial effects of volume decline

 Stylized cost model illustrates impact of volume decline on USPs’ profitability.  Assumptions on cost shares and cost elasticities per pipeline element  No changes in the USO  Volume decline results in less costs but cost savings are less significant than losses in volume and revenues.  Profits decrease more than proportionally of an efficient postal operator.

 Stylized cost model also shows that the lower the initial volume per capita (ppc) the greater the negative effect on profitability. Shortfall in profit resulting from 10 % volume decline (w.r.t. initial pieces per capita) Revenue decline not covered by cost decline

 Mail operations are characterized by a high share of fixed costs (particularly in delivery).

100% 90% 80% 70% 60% 50% 40% 30% 20%

10% 0%

Initial ppc 0

50

100

150

200

250

300

350

400

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3.2 Letter post markets (4) Profitability of USPs  Many USPs made substantial progress to become commercial.  Mail business is still important: >50% of revenues in many countries.  Many USPs focus on national business, particularly in Southern and Eastern countries. EBIT margin of mail segment 20%

15%

10%

5%

0% ATUSP DEUSP DKUSP FIUSP FRUSP ITUSP MTUSP NLUSP SEUSP UKUSP NOUSP CHUSP

 Profitability is under pressure due to volume decline (e.g. in DK and NL).  Reorganisation of postal operations to save costs and improve cost flexibility  Price increases  Seek growth in parcel services, international mail, parcel & express and logistics activities, and in financial services  Generally, the more commercially minded the USP, the better prepared it is for change in market conditions.

-5%

-10% 2010

2011

2012

Source: WIK survey and WIK research

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3.3 Parcel and express markets (1) Demand  European parcel & express markets are dynamically growing mainly driven by growth in domestic and cross-border e-commerce.  B2B mainly driven by economy, B2C more by e-commerce.  Online sales have broadened the customer base for parcel operators.  Countries with mail ordering tradition are more advanced in online sales (particularly Western countries).  Large mail order companies founded B2C parcel operators in the largest markets (DE, FR, UK).  Many Eastern and Southern countries have significant growth rates in online sales.

Distance selling: Revenues per capita (EUR) 1,400 1,200 1,000 800

600 400 200 0 AT BE DE DK

FI

FR

IE

NL SE UK NO CH EL ES

Western countries

2000

IT

Southern countries

2007

PT CZ HU PL RO SK Eastern countries

2011

Source: Based on EMOTA, IMR Smart Knowledge base and Eurostat

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3.3 Parcel and express markets (2) Competition  Parcel & express markets are more competitive than letter post markets.

Market share of TOP 3 (revenues, 2011) 100% 90% 80%

 Private parcel & express operators focused mainly on B2B shipments in the past.

70% 60% 50% 40% 30%

 USPs’ role in C2C and B2C deliveries more important than in B2B deliveries.

20% 10% 0% BE

DE

UK

NO

CH

CY

Western countries

EL

IT

MT

PT

BG

Southern countries

EE

HR

HU

LT

PL

RO

SI

SK

Eastern countries

Source: WIK survey and WIK research

 But market growth in B2C attracts new players.  Mail companies deliver small packages.  Couriers offer same day delivery in urban areas.

 B2B parcel & express operators enter the B2C segment. 26

3.3 Parcel and express markets (3) Role of USPs  USPs usually have a first mover adavantage in B2C deliveries due to their densely postal infrastructure.  USPs face substantial competition in domestic and cross-border parcel services, particularly in the B2B segment.  Many USPs have a market share above 20% in domestic parcel services (B2B and B2C combined) 20% market share Österreichische Post (AT) Česká pošta (CZ) Deutsche Post DHL (DE) Post Danmark/PostNord (DK) Eesti Post (EE) Itella (FI) La Poste (FR) Magyar Posta (HU) PostNL (NL) CTT Correios (PT) Posten/PostNord (SE) Slovenian Post (SI) Slovenska Posta (SK) Royal Mail Group (UK) Swiss Post (CH) Norway Post (NO)

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3.3 Parcel and express markets (4) Organizing B2C deliveries  Operators seek growth in domestic and cross-border B2C, e.g.  Traditional B2B operators (e.g. DPD, GLS, UPS, national parcel & express operators like Irish Nightline) extend their business to B2C delivery. - Launching collection and delivery points (e.g. GLS parcel shops, UPS‘ acquisition of Kiala, Parcel Motel by Nightline)

- Using easily accessible parcel lockers for parcel collection and delivery - Investing in sorting and delivery capacity

 Operators develop innovative delivery solutions to improve customers’ convenience and reduce delivery costs. - Choice among different delivery options - SMS alert and time certain delivery (e.g. DPD FlexDelivery) - Simplify parcel delivery to the door step (parcel boxes)

 Cooperations among national postal operators (EPG/ERS) 28

3.4 Employment in the postal sector (1)  Traditional employment in USPs is declining but new employment opportunities in parcel operations and competing mail operators.  Overall employment development in the postal sector affected by mail volume decline, emerging competition, growth in parcel demand and continuous efforts of USPs to improve efficiency.  No complete figures on employment developments in the postal sector due to insufficient data on sector employment, particularly in the parcels and express segment. 4%

Change in revenue per FTE 2010/2011

Change in USP employment 2010/2011

15%

2% 0%

10%

-2% -4%

5%

-6%

-8%

0%

-10% -12%

-5%

-14% -16% AT BE BG CY CZ DE DK EE EL ES FI FR HU IE IT LT LU MT NL PL PT RO SE SI SK UK IS LI NO CH HR

Headcount

-10% AT BE CY CZ DE DK EL ES FR HU

IE

IT

LT MT NL PL PT RO SE

SI

SK

IS NO CH

Full-time equivalent

Source: WIK survey and WIK research

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3.4 Employment in the postal sector (2)  Increased flexibility of employment contracts to tackle changing market conditions and reduce costs (but high variation among countries).  Social partners manage change in postal operations in a socially responsible way.  Union density is traditionally high among employees of the USPs.  Examples: PostNL and Deutsche Post (no lay offs, lower wages for new employees)  Patterns of collective bargaining are changing.  Collective labour agreements are commonly used at USPs but less at USPs’ subsidiaries or USPs’ competitors  Efforts to improve labour conditions for postal workers in some MS  Social regulation conditions in authorizations applied by nearly half of MS but appear to have had little effect. 30

4 Recommendations Chapters 4 and 5 4 Analysis of Main Developments and Implications for Future Postal Policy 5 Recommendations

 Chapter 4 reviews economic and regulatory developments since 1997. It develops options for further modernisation of the EU legal framework for postal services.  Chapter 5 summarizes the conclusions of Chapter 4.

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4.1 Future definition and regulation of universal service  The EU definition of the minimum USO should further accommodate the evolution of postal markets and the expansion of the EU since 1997.  E.g., EU-wide principles could include affordability and ubiquity while allowing Member States to adapt parameters such as service quality (or related delivery frequency) to the needs of users  Regulation of the prices and service quality of universal services should be limited where effective competition and market forces suffice to ensure quality of universal service.  But regulatory tools must be adequate to ensure universal service where effective competition and market forces cannot do so.  Designation of universal service providers (USPs) should be limited to specific circumstances in which designation is objectively required and proportional. 32

4.2 Regulation of postal services outside the scope of universal service  NRA regulation could reasonably be extended to market dominant non-universal services provided by USPs.  Provisions in the Postal Directive which protect fair competition in the universal service area should be applied to market dominant postal services outside the universal service.  It appears reasonable to vest NRAs with emergency authority to preserve competition at least in cases where –  There is a prima facie finding of infringement of the competition rules, or  There is a history of past infringements for which there is a plausible risk of reoccurrence.

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4.3 A modern institutional framework for cross-border postal services  EU institutions should assume a larger role in controlling cross-border postal services.  The Commission should issue a notice clarifying the application of the EU competition rules to cross-border postal services.  Application of the Postal Directive and EU competition rules to multilateral terminal dues agreements should be strengthened.  The Commission should participate more actively in the development of a coordinated position among Member States towards the UPU that supports and promotes the development of cross-border e-commerce.

 The Commission should use ongoing trade negotiations to seek a legal framework cross-border postal services that fully reflects principles of the Postal Directive, EU competition rules, and the Modernised Custom Code. 34

4.4 Resolving potential restraints on competition  The EU should apply the VAT exemption in a non-discriminatory manner to all postal operators providing equivalent services.  In line with the principles of the Postal Directive and the Modernised Customs Code, the EU should apply customs law in a non-discriminatory manner to all cross-border operators.  The Postal Directive should provide clearer limits on the extent to which conditions relating to quality, availability, and performance which may be attached to authorisations.

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4.5 Other recommendations  The ERGP and the Commission should collaboratively define standard statistical accounts for the collection of basic market data from all postal operators.  Cost allocation principles of the Postal Directive should be revised.  The fully distributed cost allocation system prescribed by Article 14 is overly rigid and poorly understood by NRAs.  To facilitate a better understanding of the effects of postal policy on employment, NRAs should periodically gather relevant employment statistics from all postal operators.  The Commission should update its 1998 Notice on the application of competition rules to the postal sector.  The Commission should encourage formal cooperation between NRAs and NCAs. 36

Project Contact: Alex Kalevi Dieke WIK-Consult GmbH Postfach 2000 53588 Bad Honnef Germany Tel +49 2224-9225-36 Fax +49 2224-9225-66 email [email protected] www.wik.org

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