Discussion Papers

Ulrich Stumpf

Terminal dues reform - Towards a domestic tariff based system
Nr. 115 / August 1993


What price should public postal operators charge for inward cross-border mail? The UPU and CEPT terminal dues systems have become the subject of much criticism. This report welcomes terminal dues reform: Time is ripe that Community or OECD public postal operators implement a terminal dues system based on domestic tariffs. The report

- sketches how current terminal dues systems are constructed and why they should be abandoned,
- analyses how a domestic tariff based terminal dues system could be designed and why it should be implemented,
- demonstrates under which conditions public postal operators can arrive at an agreement and in which way regulators can contribute to a successful reform.

Why uniform terminal dues systems should be abandoned

UPU and CEPT terminal dues systems are based on per-kilo and per-item charges, which are applied in a uniform way by all participating postal administrations. This neglects four important pricing factors:

- structure of inward cross-border mail,
- country specific differences in network costs, in particular different national wage levels,
- degree of mail preparation and presortation,
- quality of service.

Uniform terminal dues systems have one advantage: They can be operated with very low transaction costs. This advantage, however, is outweighed by important efficiency losses. Uniform terminal dues systems

- distort price strucures,
- provide no incentives for efficient worksharing,
- are responsible for the poor quality of cross-border services,
- provide wrong price signals for competition in (outward) cross-border mail.

Finally, UPU and CEPT terminal dues systems do not grant equal access to inward delivery networks. Those systems, therefore, seem to be incompatible with the Competition Rules of the Treaty of Rome.

Why a domestic tariff based terminal dues system should be implemented

A major advantage of a tariff based terminal dues system is that it can reflect all important pricing factors:

- By relating the terminal dues rate to the domestic tariff, country specific cost differences (national wage level, in particular) are taken into account. Moreover, the price structure used in the domestic service is applied to inward cross-border mail.
- The terminal dues rate can be related to the domestic tariff rate in a way that reflects avoided costs.
- Discounts for mail preparation and presortation can be given that reflect avoidable costs.
- Also, terminal dues can be related to the fulfillment of a predefined quality standard in a way that provides adequate quality incentives.

A tariff based system, no doubt, creates higher transaction costs than classical systems. The structure of inward cross-border mail has to be established. Also, a monitoring system for inward cross-border quality has to be implemented. The other side of the coin are the economic efficiency gains made possible. A tariff based terminal dues system

- generates more efficient price structures,
- imposes incentives for efficient worksharing,
- creates the incentives necessary for an improvement of quality of cross-border letter services,
- provides the right price signals for competition in outward cross-border mail.

A tariff based terminal dues system also provides equal access to inward delivery networks. Private operators and large foreign business customers are granted access at the same terminal dues rate and the same quality of service level as public postal operators. Only a domestic tariff based system seems to be in accordance with the Competition Rules of the Treaty of Rome.

How to arrive at a terminal dues agreement

Traditionally, terminal dues agreements are negotiated between postal administrations. This also applies to current terminal dues reform. While regulators take a passive role, development and implementation of a tariff based system rests the task of postal administrations.

Some complementary regulatory action, however, is necessary:

- The proposed terminal dues system is based on domestic tariffs and quality of service standards, which have to be mutually acceptable. An engagement of regulators of participating postal admininstrations to care for an effective domestic regulatory environment is indispensable. Within the European Community, the Commission can have an active role in implementing effective regulatory frameworks.
- A cost based terminal dues system must be protected against circumvention, which necessitates some modifications of the UPU Convention. The proposal that bulk commercial mail should no longer be accepted at uniform UPU terminal dues rates is welcomed in the report.

Under these conditions, terminal dues reform will be to the advantage of most Community or OECD public postal operators, at least in the longer run. It is to the benefit of most postal administrations to agree upon a tariff based terminal dues system. Only four postal administrations might experience disadvantages: These are the Post Offices of Greece, Portugal, Spain and Turkey, where the contribution provided by inward cross-border mail might be reduced as a result of joining a tariff based system. Those postal administrations could be given a financial incentive to participate in the new system. Postal administrations, which profit from joining a tariff based terminal dues system, could offer a compensation payment, which is large enough to compensate the disadvantages. The compensation payment should be a lump-sum payment offered under the condition that it is invested into improving the quality of the postal network.

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