An Index of Postal Sector Liberalization

1. An Index of Postal Sector Liberalization Presented to the 11th Conference on Postal and Delivery Economics June 7, 2003 Toledo, Spain INTRO: This paper and project were conducted jointly by IBM and World Bank Purpose of the Presentation is to describe the key elements of the paper on postal sector liberalization and to provide highlights of the policy implications we discuss in the paper The paper presents an analytical approach for evaluating the effects of specific, measurable factors on the degree of liberalization of a postal marketINTRO: This paper and project were conducted jointly by IBM and World Bank Purpose of the Presentation is to describe the key elements of the paper on postal sector liberalization and to provide highlights of the policy implications we discuss in the paper The paper presents an analytical approach for evaluating the effects of specific, measurable factors on the degree of liberalization of a postal market

2. Agenda Overview of the Liberalization Index Liberalization Index Results Policy Implications This presentation will begin with a broad overview of the liberalization Index and how it was constructed and how it is being used by the World Bank. Then we will present some high-level results. Finally, Isabelle Andress of the World Bank will discuss some of the resulting policy implications that were derived or confirmed as a result of the study. This presentation will begin with a broad overview of the liberalization Index and how it was constructed and how it is being used by the World Bank. Then we will present some high-level results. Finally, Isabelle Andress of the World Bank will discuss some of the resulting policy implications that were derived or confirmed as a result of the study.

3. Overview of the Liberalization Index

4. Liberalization in the Developing World The Postal Sector provides a basic communications infrastructure needed for economic and social welfare in the developing world. Reserved area for Posts was designed to generate compensation for providing universal service. Current model is constrained by a government�s resources, lacks a ubiquitous infrastructure, and may not provide universal service or universal access. Significant attention has been paid to other regulated, formerly legally protected monopolies � Water, Utilities, Energy. Posts, particularly in the developing world, have largely been ignored. This slide is a quick overview of the sector and how it relates to the developing word in order to put this presentation and paper in context. The postal sector clearly plays a significant role in maintaining a basic communications infrastructure fundamental to economic and social welfare of a nation � this is no less true in the developing world. In terms of the Monopoly � generally, a reserved area was designed to compensate posts for providing this basic communications infrastructure for all if its citizens. However, In the developing world, the current model has some pretty serious limitations � Government resources are very limited and the infrastructure does not support universal service or even universal access to services. While new regulations, liberalization, commercialization, and even privatization has occurred in similarly regulated, formerly monopoly protected entities such as telecommunications and utilities, posts have largely been ignored � PARTICULARLY IN THE DEVELOPING WORLDThis slide is a quick overview of the sector and how it relates to the developing word in order to put this presentation and paper in context. The postal sector clearly plays a significant role in maintaining a basic communications infrastructure fundamental to economic and social welfare of a nation � this is no less true in the developing world. In terms of the Monopoly � generally, a reserved area was designed to compensate posts for providing this basic communications infrastructure for all if its citizens. However, In the developing world, the current model has some pretty serious limitations � Government resources are very limited and the infrastructure does not support universal service or even universal access to services. While new regulations, liberalization, commercialization, and even privatization has occurred in similarly regulated, formerly monopoly protected entities such as telecommunications and utilities, posts have largely been ignored � PARTICULARLY IN THE DEVELOPING WORLD

5. Major Reforms are Necessary The Postal industry is currently in a phase of fast and significant transformation, creating enormous challenges for this traditional service sector. - Increasing competition - New customer demands - Technological change - Globalization Like in the telecommunications sector, major legislative, regulatory and institutional reforms have to create the platform for vitalizing the sector and for increasing private sector participation. The Postal industry � particularly in the DEVELOPED World is currently going through significant changes. This transformation is creating enormous challenges. Key drivers of change have been � Competition, Technology, globalization and an increased focus on satisfying customer demands Major reforms are deemed necessary to stimulate growth and activity in the sector Unlike telecom, postal markets frequently remain under the control of governments and are dominated by a single provider. However, in the effort to promote competition, this is beginning to change.The Postal industry � particularly in the DEVELOPED World is currently going through significant changes. This transformation is creating enormous challenges. Key drivers of change have been � Competition, Technology, globalization and an increased focus on satisfying customer demands Major reforms are deemed necessary to stimulate growth and activity in the sector Unlike telecom, postal markets frequently remain under the control of governments and are dominated by a single provider. However, in the effort to promote competition, this is beginning to change.

6. The Liberalization Index The Liberalization Index is designed to help the World Bank evaluate the role of legislative, regulatory and institutional changes on the liberalization of the postal markets. During the first week of April, 2002, we sent questionnaires to 45 postal operators in Eastern and Western Europe, Africa, Asia, and Latin America. The responses from 26 of these countries were used in creating the Liberalization Index. IBM Business Consulting Services was contracted to create an index of liberalization based on each country�s responses to the questionnaire. The Liberalization Index is intended to provide the policy division of the World Bank (CITPO) with additional insight into the postal sector. It is not intended as an investment assessment tool. The index is designed to help the Bank evaluate the effects of legislation, regulation & changes in institutional structure of posts on the liberalization of postal markets. Approximately 1 year ago, the World Bank and IBM Business Consulting Services got together to study the degree of liberalization in 45 selected countries throughout Europe, Africa, Asia and Latin America. 26 countries provided sufficient responses to the survey questionnaire to be included in the index Important to note that the index is not for World Bank Investment Purposes, but rather, to provide policy makers a tool to better understand developments in the sector.The index is designed to help the Bank evaluate the effects of legislation, regulation & changes in institutional structure of posts on the liberalization of postal markets. Approximately 1 year ago, the World Bank and IBM Business Consulting Services got together to study the degree of liberalization in 45 selected countries throughout Europe, Africa, Asia and Latin America. 26 countries provided sufficient responses to the survey questionnaire to be included in the index Important to note that the index is not for World Bank Investment Purposes, but rather, to provide policy makers a tool to better understand developments in the sector.

7. 26 Countries Profiled in the Liberalization Index biased - developing world but includes selected developed world countries for comparison Botswana Cambodia Chad Chile Czech Republic El Salvador Germany Great Britain Guatemala Honduras Hungary Kenya Lesotho biased - developing world but includes selected developed world countries for comparison Botswana Cambodia Chad Chile Czech Republic El Salvador Germany Great Britain Guatemala Honduras Hungary Kenya Lesotho

8. The Five Factors of Liberalization Market concentration Degree of competition and the relative position (in terms of market share) held by postal service providers in the market. Market-wide obligations Service obligations and their assignment to market operators, specifically the USO Universal service (both its obligations and benefits) has the potential to distort competition. Where de facto competition exists, the universal service provider may not be able to compete effectively. The burden of the USO may even outweigh the benefits that accrue as a result of the exclusivity rights causing universal service to be provided at a financial loss. Market-wide privileges The degree to which the universal service provider competes on a level playing field with private companies. Market regulation Legal and regulatory structure of a particular market or the existence of specific legislation governing the postal sector. Independence of the regulator and whether the regulator has control over setting prices for reserved services. Commercialization Degree of corporate freedom and commercial flexibility. Measures the extent to which the universal service provider is permitted and required to operate its business in the same manner as a private company. Barriers to entry Any natural or created forces that protect incumbent operators and inhibit the participation of other providers in a postal market.Market concentration Degree of competition and the relative position (in terms of market share) held by postal service providers in the market. Market-wide obligations Service obligations and their assignment to market operators, specifically the USO Universal service (both its obligations and benefits) has the potential to distort competition. Where de facto competition exists, the universal service provider may not be able to compete effectively. The burden of the USO may even outweigh the benefits that accrue as a result of the exclusivity rights causing universal service to be provided at a financial loss. Market-wide privileges The degree to which the universal service provider competes on a level playing field with private companies. Market regulation Legal and regulatory structure of a particular market or the existence of specific legislation governing the postal sector. Independence of the regulator and whether the regulator has control over setting prices for reserved services. Commercialization Degree of corporate freedom and commercial flexibility. Measures the extent to which the universal service provider is permitted and required to operate its business in the same manner as a private company. Barriers to entry Any natural or created forces that protect incumbent operators and inhibit the participation of other providers in a postal market.

9. Methodology Using a hierarchical decision process, a group of industry experts assigned various weights to each of the factors by rank ordering the individual indicators within each of the factors and then each of the factors relative to one another. Survey questions required mostly dichotomous (Yes/No) or other categorical responses. Questions were categorized into one of the factors relating to liberalization. Each of the indicators was then assigned a relative weight using a panel of industry experts � Weights are shown in figure 39% Market Concentration � was deemed the most significant determinant in deciding the degree of liberalization � regardless of legal justification for competition. 20% Market-wide Privileges 17% Commercialization 12% Market Regulation 12% Market-wide Obligations Survey questions required mostly dichotomous (Yes/No) or other categorical responses. Questions were categorized into one of the factors relating to liberalization. Each of the indicators was then assigned a relative weight using a panel of industry experts � Weights are shown in figure 39% Market Concentration � was deemed the most significant determinant in deciding the degree of liberalization � regardless of legal justification for competition. 20% Market-wide Privileges 17% Commercialization 12% Market Regulation 12% Market-wide Obligations

10. The Liberalization Index � Guiding Principles Market concentration is based on country reported data for letter post market share. Incorporates only self-reported questionnaire data from each postal operator. Index creates a relative score, which is more important than the numerical value assigned. Snapshot of postal operators at the point in time when data were collected. Letter Post data was used exclusively in determining market shares Self-reported data from postal operators inherently provides bias Index creates a relative score, not an absolute numerical value Snapshot at a point in timeLetter Post data was used exclusively in determining market shares Self-reported data from postal operators inherently provides bias Index creates a relative score, not an absolute numerical value Snapshot at a point in time

11. Liberalization Index Results

12. The Liberalization Index A perfectly liberal marketplace results in a score of +1 (represented by Country A) and a completely illiberalzed market results in a score of �1 (or country Z) To improve the integrity of the data, postal operators were assured that the data provided would remain confidential and would only be discussed in aggregate. Thus countries have been renamed A through Z However, as an example, we were given permission from Trinidad and Tobago and Tanzania for illustrative purposes. Tanzania is Country L Trinidad and Tobago is Country NA perfectly liberal marketplace results in a score of +1 (represented by Country A) and a completely illiberalzed market results in a score of �1 (or country Z) To improve the integrity of the data, postal operators were assured that the data provided would remain confidential and would only be discussed in aggregate. Thus countries have been renamed A through Z However, as an example, we were given permission from Trinidad and Tobago and Tanzania for illustrative purposes. Tanzania is Country L Trinidad and Tobago is Country N

13. The Liberalization Index � Two Case Studies Of all post that reported market share data, 47% had greater than 90% market share (:. Highly Illiberal) 13% reported less than 70% market share (:. Few Liberalized) 40% reported between 70% and 90% market share Tanzania Government Corporation Independent Regulator � Communications Commission Regulator plays a role in defining market entry, defining competition, defining USO, permitting new products and services, and price setting USP can establish partnerships with private companies and enter into 3rd party management contracts USO defined in separate Postal Law and is supported solely by a reserved service area Performance Contracts do exist between the Government and the Post Commercial Accounting System with independent budget Trinidad and Tobago Government Corporation Regulator is a ministry � Ministry of Public Utilities and Environment USP can establish partnerships with private companies and enter into 3rd party management agreements USO defined in separate Postal Law and is supported by a reserved service area, state subsidies licensing fees, and the WB funding for infrastructure development Performance Contracts do not exist between the Government and the Post Commercial Accounting System with independent budgetOf all post that reported market share data, 47% had greater than 90% market share (:. Highly Illiberal) 13% reported less than 70% market share (:. Few Liberalized) 40% reported between 70% and 90% market share Tanzania Government Corporation Independent Regulator � Communications Commission Regulator plays a role in defining market entry, defining competition, defining USO, permitting new products and services, and price setting USP can establish partnerships with private companies and enter into 3rd party management contracts USO defined in separate Postal Law and is supported solely by a reserved service area Performance Contracts do exist between the Government and the Post Commercial Accounting System with independent budget Trinidad and Tobago Government Corporation Regulator is a ministry � Ministry of Public Utilities and Environment USP can establish partnerships with private companies and enter into 3rd party management agreements USO defined in separate Postal Law and is supported by a reserved service area, state subsidies licensing fees, and the WB funding for infrastructure development Performance Contracts do not exist between the Government and the Post Commercial Accounting System with independent budget

14. Results of the Liberalization Index Latin America � De facto most liberal Very low market concentration for universal service provider High legal/regulatory barriers not enforced Africa � De facto liberal Low Market concentration for universal service provider, numerous providers High legal/regulatory barriers not enforced Western Europe � De jure most liberal Lowering legal/regulatory barriers High market concentration Asia � Not Liberal High barriers to entry Strictly regulated environment Eastern Europe � Not Liberal High barriers to entry High market concentration Latin America � De facto most liberal Very low market concentration for universal service provider High legal/regulatory barriers not enforced Africa � De facto liberal Low Market concentration for universal service provider, numerous providers High legal/regulatory barriers not enforced Western Europe � De jure most liberal Lowering legal/regulatory barriers High market concentration Asia � Not Liberal High barriers to entry Strictly regulated environment Eastern Europe � Not Liberal High barriers to entry High market concentration

15. Regional Analysis Latin America � De facto most liberal Very low market concentration for universal service provider High legal/regulatory barriers not enforced Africa � De facto liberal Low Market concentration for universal service provider, numerous providers High legal/regulatory barriers not enforced Western Europe � De jure most liberal Lowering legal/regulatory barriers High market concentration Asia � Not Liberal High barriers to entry Strictly regulated environment Eastern Europe � Not Liberal High barriers to entry High market concentration

16. Policy Implications

17. Trends Toward Corporatization and Liberalization Corporatization of the Public Postal Operator has begun to occur. Corporations remain mostly state-owned. De jure limits of the monopoly have been reduced. Western European markets have specifically begun to reduce legal and regulatory barriers. De facto competition in developing countries places greater pressure on historical operators. Historical operators remain dominant in most markets. Latin American markets tend to have greater de facto competition. African markets tend to have a large number of alternative providers.

18. New Questions Raised and New Horizons Opened Similarities and differences between industrialized and developing countries. Market Dynamics (mail volumes, limited or no direct marketing, characteristics of the demand, purchase power, illiteracy) Universal Service (supply) versus Universal Access (demand) Competition, Private Sector participation and Quality of Service Regulatory Approach (limited competition, limited experience, limited resources) Similarities and differences in the postal and telecommunications sectors. Sequencing of sector reform Universal service fund versus �smart subsidies�

19. Improvements in Sector Monitoring and Performance Developing countries need to have a detailed understanding of their postal sector. Market dynamics are not understood. Sector policies are rarely defined. Universal Service/Universal Access should be clearly defined in postal law, at least to allow a fair evaluation of associated costs. Information systems of historical operators should be strengthened to allow improved internal management (cost accounting) and quality of service. Regulators should aim at building a constructive relationship with operators and consumers (transparent markets, level playing field competition). Historical operators should improve their market orientation, management capacities, and financial sustainability.

20. Next Steps Additional research on the effects of regulatory reform on postal market dynamics. Additional research on the impact of postal reform on sector growth and economic development at large. An assessment of the privately supplied market segments. Greater understanding of the market dynamics in the postal sector.

21. An Index of Postal Sector Liberalization Presented to the 11th Conference on Postal and Delivery Economics June 7, 2003 Toledo, Spain