The EU’s new postal directive and the liberalisation of postal markets in Finland

Abstract

This report examines how the EU postal directive is reflected in the Finnish postal market. It also assesses the cost structure of postal operations, which largely determines how and on what terms it is worthwhile to promote competition in the postal market. Particular attention is paid to how inconsistent quality of service requirements — especially with regard to the frequency of mail delivery — are affecting the postal market and the operating conditions of the universal service provider. Finally, an assessment is made of how service quality requirements should be taken into account when applying the EU postal directive.

The EU postal directive is changing the Finnish postal market. Compared to current practice, the conditions for competitors to enter the market against Itella are becoming less restrictive. The EU postal directive is, however, broad and open to interpretation. The greatest problems are caused by the requirement in Finland’s current Postal Services Act that the universal service provider delivers ordinary letter mail at uniform prices throughout the country. This provision, together with the relaxation of market entry conditions, is leading to market entry that is not based on efficiency. Both in the application of the EU postal directive and in other legislative work, regulations should encourage only such market entry where the new company is more efficient than the existing one. In optimal practice, a market entrant must be clearly more efficient than the dominant operator (Itella in Finland) if commencing operations requires fixed investments. For the above reason, market entry into full-scale — all-inclusive — postal operations can hardly be considered desirable from society’s perspective. Market entry could be encouraged for partial operations, as a result of which the market entrant would have to rely on the dominant operator’s network. In that case, the network rental fee should be set in such a way as to encourage only efficient companies to enter the market.

Regionally uniform pricing could be safeguarded if the universal service provider’s losses from postal operations in sparsely populated areas were covered by a levy on postal operations in densely populated areas. Charging a network access fee and production levy on the universal service provider is justified when new companies can either bypass Itella’s network entirely or enter the market by purchasing part of their services from Itella (or from another operator). The EU postal directive also puts to the test the requirement placed on the universal service provider to deliver letter mail on every working day. Market entry cannot be permitted on an entirely different concept whereby Itella’s competitors deliver high-volume business mail, for example, on a couple of days per week, while Itella is obliged to deliver it on every working day. The basis for postal subsidies (and any production levy) should rest on a standard of quality for the universal service provider — and more broadly for quality levels — that meets contemporary requirements. In this respect, raising the standard that determines mail delivery speed could also be considered. (Too low a standard naturally creates space for inefficient market entry.)

In the current situation, profits from postal operations in densely populated core areas cover the losses incurred from operations serving sparsely populated areas. After the postal directive comes into force, the situation will become more difficult, as postal operations even in core areas are at risk of becoming loss-making. The report presented a calculation of how Itella’s profitability would develop if the EU postal directive were applied in the most obvious manner. This calculation assumed that new companies entering the market would bypass Itella’s distribution network and that no compensation would be charged from them for concentrating their operations solely on the most profitable market segments. It was likewise assumed that Itella would continue to operate in remote areas under the old terms. According to the calculation, this would result in a loss of 150–175 million euros for Itella, and its overall profitability would also become negative. Competition would reduce the price of services in densely populated areas by approximately 30 percent. Postal services would no longer be priced on a regionally uniform basis, as the price level in the rest of Finland would remain unchanged. (AI translation)

• ISSN: 1795-2832
• ISBN: 978-952-209-078-2
• Press Release in Finnish
• Publication in PDF-format