Tendering Universal Service Obligations in Liberalized Postal Markets An Outline of Thought

1. Tendering Universal Service Obligations in Liberalized Postal MarketsAn Outline of Thought Christian Jaag University of St. Gallen and Swiss Post Urs Trinkner University of Zürich and Swiss Post GPREN Postal Research Conference April 28th 2008

2. Introduction • Tendering is often used to confer to someone • a right (e.g. to use a certain spectrum for mobile telecommunication) • A duty (e.g. to build a tunnel across the alps) In these cases, the winning party usually operates in a well defined market environment. • Recently, tendering has also been used to assign universal services, e.g. in telecommunications.What will the market environment be? • In the postal market Tendering of postal USO envisioned in Germany, Netherlands, Switzerland.

3. Public Procurement Public need Definition of a package of duties and rights, possibly including exclusivity Public or private provision Public provision Contracting Tendering / negotiation Negotiation Tendering Subcontracting Negotiation Tendering

4. Issues with Universal Service Provision • Allocative options • Exogenous choice • Beauty contest • Tender / reverse auction • Distributive options • Ex ante compensation (based on estimated cost) • Ex post compensation (based on „true“ cost) • Goal: Efficient provision • By most efficient operator selection problem • With most efficient technology incentive problem • At the lowest possible public cost transfer problem

5. Tendering USO will solve all problems… Why? It applies market forces where a market would otherwise not exist  „competition for the market“ Why not? Competition has to be well designed to work properly…

6. Simple Case: Homogeneous Operators • Winner‘s curse: The operator who underestimates the cost the most wins the auction High risk taken by bidding operators • If operators realize this, they ask for a high price! • If operators do not realize this: Renegotiation! Given its „design cost“, USO tendering is expensive; the transfer problem remains unsolved. True cost  no selection / incentive problems Cost estimates

7. The Net Cost of Providing Universal Service The net cost of providing universal services depends on • Universal service provider (efficiency?) • Competitors (strategy) • Regulator (network access, labor market) • Technology • Consumer behavior / preferences

8. More realistic case: Heterogeneous Operators Tendering solves the incentive problem. How important is the • selection problem? • transfer problem? • large if technology is „volatile“ • large if competitive/regulatory risk is high True cost (operator-specific) Cost estimates

9. Contract Design – Dimensions of US • Ubiquity • Collection • Delivery • (Sorting) • Quality • Frequency of Delivery • Timeliness • Price • Uniformity • Level (affordable, moderate, reasonable) Cost Predictability

10. Contract Design – Trade-Offs • Duration • Long-term contracts for investment incentives • Short-term contract for technological flexibility • Level of Aggregation • Global approach for economies of scale and scope • Disaggregated approach allows for yardstick competition • Concreteness • Detailed contracts to avoid renegotiation • Openness allows for commercial/technological flexibility • Ownership of Postal Operators • Fairness calls for full privatization • State ownership facilitates governance

11. Conclusion • Tendering is a potentially powerful tool for efficient universal service provision. • There are fundamental issues to be considered, e.g. that tendering introduces new risks. • Trade-offs in design hard to solve. • Do we know what we are doing?

12. Thank you. Christian Jaag Swiss Post Regulatory and International Affairs Viktoriastrasse 21 3030 Bern Christian.jaag@post.ch