Full liberalisation in the postal market will lead to changes in costs, prices and regulation

16 August 2010 | Regulation and policy

Ian Streule


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In recent years, postal systems across Europe have evolved largely in response to a decline in the amount of personal letters sent, an increase in parcel delivery services and, of course, greater liberalisation.  As the EC expects individual member states to open their postal markets to full competition by the end of 2010, there are likely to be more radical changes in the market, with greater competition in the collection, sorting and delivery of mail, and increased regulation of prices charged by dominant incumbent postal providers. 

Given the economies of scale in delivery, the majority of low-weight mail will most likely  continue to be delivered by the incumbent. Upstream competition, particularly for bulk mail, is well established in a number of European member states, meaning that regulated downstream access prices are a key component of regulation. Regulators need to establish a fair price for such wholesale services, typically using an established wholesale regulatory pricing method. With the adoption of the Third Postal Directive, this should be cost-based.

As incumbent postal providers compete in a liberalised market, NRAs need to ensure there is a fair balance of cost recovery from competitive and dominant services. Accounting separation between these parts of the incumbent’s business may assist in this regulatory test, but the cost modelling required for this in a vertically integrated, end-to-end, multi-product pipeline is demanding.

  • In a national postal network, assets and activities are shared between upstream and downstream activities, both at the network periphery (collection and delivery) and in the mail centres. This requires costs to be allocated objectively to the different areas, and any separated accounts for theoretical businesses will need to tackle the shared costs carefully. Recognised regulatory costing approaches, such as activity-based costing, fully-allocated costing or incremental costing, provide some solutions to the problem of sharing out large costs.
  • A minority of costs come from capital assets, with staffing costs being the largest cost in an incumbent mail provider’s business. Opex allocations, particularly staff costs, are typically hard to model. Capex may be allocated by the asset functions, for which logistics, machines and technology normally perform well-defined and measurable activities. 
  • Postal networks are being modernised.  Changes in demand, mail centre rationalisation, increasing mechanisation and use of technology (e.g. bar-coded mail), combined with modernisation of the labour force, must be taken into account.
  • Measuring the volume of mail by product type is also complicated. There are many different products in multiple handling forms, and volumes are not uniquely known.

We have recently assisted UK regulator Postcomm investigate the regulated costs and prices of Royal Mail’s letter services, in support of a major new consultation into the future regulation of the UK mail market following full market opening.

Our investigation of such issues for Postcomm has leveraged our deep knowledge of pricing, costing and regulation in telecommunications markets.  We recognise that there are many similar problems to solve in increasingly liberalised postal markets, such as maintaining (or funding) the USO, effective regulation of dominant players, economic costing and technology evolution.  In our results, we can also reflect the areas in which the postal market differs from telecoms, for example:

  • its inherent network asymmetry, where there is a one-way flow from sender to recipient, combined with a small number of major (bulk-mail) senders
  • the high dependence on labour, and limited physical machinery (transportation, sorting machines)
  • the diversity of products in the system.

Analysys Mason has the full range of strategic, financial accounting, economic cost modelling and regulatory development skills which NRAs, policy makers and major postal service providers will require as their postal markets develop in the coming years.

For further information please contact Ian Streule.


Ian Streule