United States Postal Service (USPS), one of the largest government entities in the USA with over 633,000 employees as of 2019, has been bleeding red ink on its financial statements for many years now, causing a worry that it might soon need a bail-out with tax-payers money. While majority of the crisis at USPS stems from several regulatory and legislative restrictions, privatization could help USPS to transform its business to align with changing market dynamics in the digital age and to secure sustainable future.
USPS is in dire need of a revamp
USPS, the largest postal system in the world, is feared to be gradually moving towards financial instability as the revenues are not able to meet the operational costs and liabilities.
USPS’ financial woes began with enactment of the Postal Accountability and Enhancement Act (PAEA) in 2006 which required USPS to create a US$72 billion reserve (equivalent to cost of employee post-retirement pension and health benefits during next 75 years) over a 10-year period from 2007 to 2016. This mandate added a huge financial burden and USPS has been registering losses every year since.
The situation is dire, as clearly stated in USPS’ five-year strategic plan (2020-2024), released in January 2020, highlighting the grim financial condition of the organization:
We have an underfunded balance sheet, significant debt, and insufficient cash to weather unforeseen cyclicality or changes in business conditions…we expect to run out of liquidity by 2021 if we pay all our financial obligations – and by 2024 even if we continue to default on our year-end, lump sum retiree health-benefit and pension related payments.
On February 5, 2020, US House of Representatives passed the US Fairness Act which repeals the prefunding mandate under 2006 legislation, thus, relieving USPS from financial burden of amassing huge reserves to fund retirement benefits. The reform does not exempt USPS from its obligations to its retired employees, but allows them to fund the costs on pay-as-you-go basis, a practice followed by most other government agencies and majority of private businesses in the USA. This bill still needs to be approved by the US Senate.
Even if the US Fairness Act becomes a law after being approved by the US Senate and the president, it does not seem to end all the challenges faced by USPS. The business has taken a major hit due to changing market dynamics with the rise of the Internet.
USPS’ largest revenue segment, i.e. First-Class Mail services, which include the delivery of letters, postcards, personal correspondence, bills or statements of account, as well as payments, has seen about 43% drop in volume between 2007 and 2019. This is because the mode of communication has changed drastically as email, mobile, social media, other tech-based platforms allow Americans to talk to one another instantaneously and mostly for free.
Marketing Mail, which includes advertisements and marketing packages, is another category that also took a hit because of the rise of digital media. Marketing Mail volume declined by more than one-fourth over the same period.
The package delivery service has experienced multi-fold increase with the rise of e-commerce, but it also faces growing competition from private players such as UPS or FedEx as well as e-commerce giants such as Amazon that are rapidly building and expanding their own network.
Due to the prefunding retirement benefit mandate, USPS has not been able to invest in new products and infrastructure since 2006. Rather than expanding its capabilities to capitalize on the new market opportunities, USPS had to take aggressive cost control measures and restricted investment in new service offerings, technology, and training.
Moreover, the coronavirus pandemic is adding to the woes of the agency. Though there has been an increase in online orders for medicines and food, the volume of letter mail, organization’s largest revenue stream, has seen a decline. Marketing mail category business has also gone down as a lot of companies have stopped advertising through mail. In April 2020, Congressman Gerry Connolly indicated that the mail volume could decline up to 60% by the end of the year. Further, USPS is facing a spike in expenses due to provision of necessary support and additional benefits to its workforce affected by the virus. In April 2020, Megan Brennan, then postmaster general, hinted that coronavirus-related losses could reach US$13 billion in this fiscal year.
USPS needs structural transformation to meet the demands of the digital age. USPS’ five-year strategic plan (2020-2024) emphasized that despite taking all possible measures such as cost control, technology upgradation, and service improvement, financial loses are likely to continue in absence of legislative and regulatory reforms.
Privatization to provide USPS with path towards self-sustainability?
Being a government entity, USPS is subject to many regulatory and legislative constraints which makes it less competitive than its private counterparts such as FedEx or UPS. For instance, under Universal Service Obligation, USPS is required to service all areas across the country six days a week. If privatized, USPS will be able to reduce the frequency of delivery on as-needed basis to optimize operations and control costs.
Similarly, USPS is legally obligated to serve all Americans, and hence closing down of any branches generally cause public uproar as locals in the remote and rural areas demand their right to postal service. A post office closure process takes at least 120 days during which affected public can appeal the decision. As per USPS’ five-year strategic plan (2020-2024) released in January 2020, about 36% of the retail post office locations are retained despite being unprofitable. Unlike private entities, USPS cannot easily close or consolidate underperforming non-profit facilities, a fact that adds to the financial strain for the organization.
Moreover, the pricing of the postal service, which ideally needs to be a business decision based on the cost structure and profit margins, is controlled by the US government. USPS needs approval from the government for making any changes in pricing of its products. While for private entities pricing is part of routine business decision-making, for USPS, unreasonable federal controls and limitations make it difficult to adopt a market-oriented pricing strategy for the services that USPS provides.
It is also to be noted that the average compensation offered by the USPS to it employees is higher than what private-sector workers receive. A study conducted by US Treasury found that, for 2017, the average employee costs at USPS was US$85,800, compared to US$76,200 at UPS and US$53,900 at Fed Ex. About fourth-fifth of the USPS workforce is unionized which means that salary increases occur through collective bargaining agreements. While disputes are resolved in binding arbitration, the financial health of USPS is often not given due consideration in the process. USPS could save significant costs by adopting private-sector labor and compensation standards.
Further, USPS is legally required to invest funds for retirement benefits only in treasury bonds which yield very low interest. The idea of conservatively investing retirement funds to avoid risk is reasonable, but the interest earned is too low compared to other investment returns commonly achieved by private entities. Thus, despite having large reserves, USPS is legally prohibited to make sound investment in debt and equity markets which could potentially yield higher returns.
Privatization and breaking away from these limitations would allow USPS to at least attempt to optimize its operations, amend service standards, provide more pricing flexibility, and earn greater return on investments.
Time and again, US president Donald Trump has proposed privatization of USPS to make it self-sustainable and profitable. Many countries across the world have illustrated how privatization of the postal service could be a success. For instance, a European Commission report tracking development in the postal sector between 2013 and 2016 indicated that post-privatization postal services were able to diversify their revenue sources, reduce the labor costs, upgrade technology and infrastructure, close unprofitable facilities, and improve delivery frequency based on demand – all the measures which USPS needs to take. Thus, privatization could potentially help USPS to transform its business towards self-sustainability.
It can be argued that upon privatization, USPS may lose certain privileges it enjoys as a government entity. For instance, at present, USPS is exempt from all government taxes, but if privatized, USPS will be subject to federal, state, as well as local taxes. USPS boasts huge workforce operating more than 31,000 post offices using 204,274 delivery vehicles as of 2019. When USPS is opened to competition, it will have the distinct advantage due to its wide-spread delivery network and last-mile delivery capabilities. From market point of view, levying taxes on USPS may actually create a level-playing field for all the postal delivery firms promoting healthy competition. This will in turn prove to be good for the overall development of the sector.
If the idea of USPS privatization floats through, e-commerce companies and retailers such as Amazon and Walmart could be interested in acquiring a majority stake. As the e-commerce business grows, such companies are investing billions of dollars in building logistics network and capabilities to acquire larger market share. Moreover, they already rely on USPS for last-mile delivery. For instance, as per a Morgan Stanley report released in 2018, Amazon accounted for about a quarter of USPS package business. Thus, USPS’ large delivery network and resources offer a great value proposition to these companies.