If this sounds like the concern expressed about the “public option” U.S. health insurance reform proposal, there is a good reason: the issues are remarkably similar.  In the U.S., the U.S. Postal Service has largely avoided competition with the private sector, except in the area of package delivery, in which it competes with UPS and FedEx, express mail, in which it also competes with these same companies, and international mail, in which it competes with DHL, and, more recently, Pitney Bowes.

However, outside the United States, postal services actively compete in retailing banking with private companies.  In fact, in some countries, particularly in Europe, postal services also providing printing, mailroom management, and copying services in competition with companies like Xerox, Pitney Bowes, RR Donnelley, and Oce.

What has been the experience of the “public option” in postal service competition?  First, in the U.S., despite repeated efforts since 1970 to have elected officials let the U.S. Postal Service operate independently of political interference, the temptation has been too great for politicians to intervene politically quite often.  Elected officials have consistently stopped the U.S. Postal Service from closing facilities, even when they have gotten management and union buy-in for operational reasons to close a facility or relocate work.  This has been the case all over the world, not just in the United States.  Therefore, my first observation is that any “public option” health plan would not be able to operate as an independent insurance program; it would be subject to significant political interference.

Second, although postal services, including the U.S. Postal Service, are actually supposed to operate outside the federal budgets of the countries in which they are incorporated, and are supposed to have transparent financial reporting, politicians regularly help postal services when they are in trouble, and raid them like a cookie jar when the federal government is in trouble.  There is no financial transparency of the kind private companies must observe.  The best example of this is what happened with the 2006 U.S. postal reform legislation.  The U.S. Postal Service was forced to prefund its entire retiree medical program over 10 years, not because it is a good accounting or business practice, but because a front-loaded retiree medical pre-funding helped the Congressional Budget Office determine that the postal reform legislation was “cost-neutral.”  Many people believe that the U.S. Postal Service financial deficits indicate that it is being badly run; that is not the case.  It is simply being saddled with artificially front-loaded expenses to reduce the federal government deficit, since the Postal Service operates outside the federal government budget.

Third, despite repeated claims by elected officials that postal services would not necessarily compete unfairly against private sector companies, they have repeatedly violated competition laws, especially in Europe, where the national governments have permitted postal services to expand their businesses most liberally.  In fact, not only have postal services been given freedom to engage in largely unpunished predatory behavior, but they have used their political clout to get laws passed to make it extremely difficult for new competition to emerge.  In Germany, at the end of 2007, Deutsche Post lobbied successfully for a minimum wage law that only applied to postal employees, and that was set artificially high to correspond with Deutsche Post’s average wage.  One of Deutsche Post’s leading competitors went out of business almost immediately.

Fourth, the most expansive postal services with the broadest charters to expand into new businesses generally did not operate cost-effectively or deliver high-quality service.  The U.S. Postal Service runs a better operation than any other major postal service, in all likelihood, because it has the most focused charter and the least ability to expand.  There are good reasons to allow some degree of additional operating freedom for the U.S. Postal Service, but even a modest expansion would not make it anywhere near a Deutsche Post or a Japan Post in the scope of its businesses.

In Germany, a first-class letter costs .50 Euros, which is over $.70, even though the country is smaller and the service obligations for the same geographic footprint are no greater than they are in the United States.  What has happened in every country in which postal services have competed with more aggressively with the private sector is that their service levels have not been very good, they have not innovated in their core businesses as much, and they have become captive to other stakeholders, like unions, special interests in the legislative districts represented by powerful politicians, and non-governmental organizations.  Their customers have tended to suffer most.

I am very concerned that a broad-based public option for health insurance will have all of these pathologies.  It is too tempting for elected officials to twist and bend a public agency to their special needs in order to have a pot of money for their re-election campaigns.  The Japanese started down the privatization road because the Japan Post bank, like its counterpart in China Post, started making bad loans to fund infrastructure projects in the districts represented by powerful elected officials.  It is bad enough that banks and other financial services institutions were motivated by greed to make a number of bad lending decisions all over the world.  It was worse when postal services made bad lending decisions out of fear of offending those who regulate them.

It would be even worse if we changed our health care system to make capital investment and operating decisions subject to the whims of whatever elected officials had the most oversight responsibility or power over a yet-to-be-created public health insurance plan.

• What universal or public services do we expect of major communication media?

With respect to mail, postal services around the world all have a variety of what are called “universal service obligations.” They are expected to maintain a network that allows every citizen in their country to transact business, to deposit mail into collection boxes or at a conveniently-located post office, and to receive mail at a designated home or business address 5-6 days a week all year. Additionally, their governments expect them to subsidize charitable and educational organizations, to charge affordable and uniform prices for mail originating from individual citizens and to be large employers and anchors for rural communities. In the U.S., the Postal Service also absorbs an enforcement responsibility for obscene, offensive, and fraudulent material that gets sent through the mail. In recent years, Congress has deferred its payments to the Postal Service for the mandates imposed on the Postal Service to subsidize certain categories of mail and certain types of users, such as non-profits.

All this costs a great deal of money and puts mail at a competitive disadvantage as a communications, delivery, and advertising medium. By way of comparison, Internet service providers can be selective in whom they serve, do not have social obligations, get to charge whatever they want, and can maintain facilities and labor forces appropriate to their mission. Moreover, Congress has provided subsidies to expand Internet coverage through its Rural Utilities Service broadband program.

Prior to the 1984 break-up of the AT&T telephone system, the telecommunications business had many social obligations, but these have been largely discontinued. For example, for national defense and national emergency reasons, AT&T was expected to maintain a robust infrastructure that was expected to function in a variety of national emergency environments and to maintain uptimes well in excess of 99%. Last year, as a result of flooding in our town, telephone service was down for three days, an inconceivable situation before 1984.

So how does this affect us? Think about a potential pandemic situation. The U.S. Postal Service has successfully tested its ability to get vaccines delivered in communities within a matter of hours, with even half of its workforce disabled. On the other hand, a report of the U.S. Department of Homeland Security issued in December, 2007, indicated that the Internet and the nation’s telecommunications network would be utterly unable to function if one-third of our population stayed home.

Ironically, the reason the Internet would fail in a national emergency is the inability to control recreational use of the Internet by homebound schoolchildren playing or downloading videos, a commercial and social networking use that is celebrated as one of the benefits of this wonderful communication medium.

The Internet, created by the U.S. Defense Department to be available for national emergencies, has not been stress-tested for a wide range of emergencies and probably would not be available or successful, largely because of the huge bandwidth consumption from multi-media video and game applications, and social networking sites. Internet broadband capability would not likely be able to withstand the stress placed on it if a significant part of the population switched to using the Internet, rather than a face-to-face communications process.

If Internet service providers were required to meet universal service obligations like postal services, the pricing on Internet services would be a great deal higher, and there probably would be non-uniform pricing based on usage. This type of pricing existed with some of the providers in the 1990’s, when Internet usage was low, but everyone rebelled against constraints on usage, so the Internet went to a flat pricing model in the U.S., with some countries maintaining some degree of gradation based on bandwidth required.

However, I am very confident that, because electronic communications bears no meaningful public service obligations and no share of costs required for national emergency capability, we are creating a highly un-level playing field between physical and electronic communications.

As we start to think about the implications of a gradual evolution from physical and face-to-face communications to remote, Internet-based communications, we need to address broader societal needs, particularly those arising in a national emergency, that will be less capably addressed as a result, and, more importantly, address the unlevel playing field we have created between mail and other forms of communications. Congress either should subsidize social obligations imposed on the Postal Service, or it should demand that Internet service providers and Internet users pay a fee for comparable social obligations, such as the requirement that the Internet be usable in the event of a national emergency, or that the Internet be available for non-profits at reduced rates. We should have a consistent policy across communication media for social obligations in terms of who pays for them.

The survey reveals that consumers greatly overestimate the environmental impact of direct mail. Eleanor and I discussed the implications of this survey and how the industry can implement new technology and other initiatives to reduce the environmental impact of mail. We also discussed how industry leaders can work to improve the public perception of mail, and grow the value of mail as a medium in the long-term.

Listen to the Podcast

Why has it been so difficult? Postal issues are indicative of challenges governments all over the world have in effecting fundamental reform:

• While the broader public may benefit, the benefited individuals and businesses are focused on many issues. Those who might be harmed in the short term, in this case, postal workers, are highly focused, well-organized, and often very militant. They will react far more negatively to reform than the benefited public will act positively. Therefore, in the short run, elected officials find reform very risky.
• Competition, privatization, or other reforms are often disruptive in the short run, but beneficial only in the longer term. Politicians are much more likely to think in the short term because election cycles are relatively short.
• The disruption when reform does not work perfectly, which is often the case, is usually a highly-visible media event, whereas improved service quality does not create the same media opportunities.

The U.S. actually made some good decisions in effecting postal reform. We left a great deal of discretion to an independent regulator, and took a great deal of the heat from elected officials. Europe, on the other hand, has issued broad guidelines, but has left postal reform squarely in the hands of elected officials and regulators in each of the member countries. Some countries have dealt with more of the issues through the decisions of elected officials; others, like the UK, have had more active regulators.

In the UK, the market was opened to full competition in January, 2006. Royal Mail lost significant market share in terms of direct access to mailers, since many bulk mailers now deposit their mail with consolidators. While the Royal Mail continues to get some revenue for the mail that consolidators deposit downstream into its network, it has lost significant revenue in so short a time period that it has not been able to reduce costs at a proportionate rate. It decided to make changes to help it be more competitive, but is now experiencing a series of strikes from the Communications Workers Union. I would hope for a negotiated solution, but one thing is clear: the outcome cannot result in other postal services shrinking from the reform that has to take place.

In other markets, governments are experiencing great difficulty confronting reform, particularly in Southern Europe. While France is committed to opening its market in 2011, the market opening was pushed back from the 2009 deadline set forth in the 2nd directive.

Germany may open its market as early as 2008, but the rules governing that market are still unsettled to a degree because Deutsche Post has demanded an industry-wide minimum wage standard to level the playing field among all competitors.

Many national postal services are far more diversified than they were a decade ago, and are still not very profitable in the non-core businesses. If these postal services were publicly-held companies, or if they were in fully competitive markets with effective competition law enforcement, or if governments imposed financial discipline and accounting transparency, much of this diversification would be stalled or even reversed.

As TNT has become truly publicly-held, it has divested the logistics and the mailroom management businesses, and has made a more focused effort to define its core competencies. I believe all the major postal services will, over time, develop more focused and integrated business models than they have today. I also believe that we will see more partnerships emerge with private sector organizations that will reshape the industry and create a more vibrant sector.

However, given how long this has taken and how difficult it has been, it is clear that governmental reform is an extremely challenging task. For companies trying to do business with government during a period in which reform is contemplated or underway, they will find risks to be much higher than those they face in selling to private sector customers.

For example, technology suppliers have multiple choices on how to allocate research and product development dollars. The continued postponement of dates of any government reform initiative in any sector creates a level of risk that diverts development of best-in-class solutions away from government, particularly from smaller technology suppliers. For projects that require payment and performance bonds, the bonding company costs increase as project risk increases. I have also noticed specifically in the transportation arena that constructing transportation infrastructure has gotten astronomically more expensive with any project delays because of the fast-escalating cost of commodities like steel, nickel, and aluminum, oil-based plastics.

Both elected and appointed officials need to understand that predictability and speed of execution are extremely important in government reform projects, and that, even though the reform effort can theoretically be improved by slowing it down or modifying it, these changes in timing and direction have their own negative unintended consequences.