At the 26th Universal Postal Congress, held in Istanbul, Turkey, during September and October 2016, a new terminal dues system was agreed by the 192 member countries. Terminal dues, the cross-border remuneration system that applies to letters and small packets up to 2kg (4.4 lb), is meant to reimburse posts for delivering mail from overseas. Private operators are exempt from the system, which has received much criticism in recent years.
Paola Piscioneri is director for global data and innovation and research at the US Postal Service Office of Inspector General (USPS OIG), which produced a report in December 2015 highlighting the distortions of the terminal dues system. She explains some of the problems: “Terminal dues were established at a time when postal volumes were mostly composed of letters and controlled by national posts. Today, the post carries more and more small packets of up to 2kg. They cost more to handle and represent a highly competitive market with lots of private sector players.
“When the OIG looked at US inbound volumes of letters and small packets, including those from China, we found that USPS lost US$75m in 2014 in undercharges for inbound volume processing and delivery.”
Jim Campbell, a lawyer and independent postal consultant, is an ardent critic of the terminal dues system: “It is the same problem you have with any subsidy. It causes unfairness. Yes, consumers in America, for example, are getting cheaper goods from China, but domestic goods are suffering because domestic mailers are having to pay a bit more and the American people are subsidizing China Post, which receives a 70% discount on final delivery in the USA.”
Part of the problem, says Campbell, is the way the UPU’s terminal dues system organizes countries into groups. “To decide on the terminal dues to be paid by each post, the UPU divides countries depending on how developed they are economically,” he complains. “What you end up with is a country like China, the world’s second-largest economy, being classified in group three and being charged considerably less for the same service than we are charging Americans.”
This classification system means that those in the most-developed categories pay contributions into a quality of service fund – on top of terminal dues. This mark-up goes toward projects in the recipient country.
The apparent terminal dues distortion rose to prominence in 2015, when Amazon’s vice president for global public policy, Paul Mizener, testified before a subcommittee hearing of the US House of Representatives. He told them that Chinese retailers were often able to ship goods to customers in the USA more cheaply than domestic retailers could. Amazon released a report on the subject that cited an example: the cost to ship a 1 lb package from South Carolina to New York City would cost nearly US$6, whereas from Beijing to New York would cost just US$3.66.
Altamir Linhares, UPU program manager for remuneration systems, explains the reason behind the groupings and says that changes were agreed at the 2016 congress to address the concerns: “The aim is to get all countries into one group so that everybody applies the same rules and pays destination-country-specific rates,” he says.
Linhares says that countries are currently assessed using a postal development indicator (PDI), which is based on how developed a country’s internal postal system is. “We have now reduced the groupings down to four [from six]and we can expect in two or four years’ time to have fewer groups, if not just one, but it does depend on investment in quality of service improvement.
“In addition, from 2018 the terminal dues of small packets will be charged separately, at destination-country-specific rates. These rates will take into account the operational characteristics and costs specific to small packets, which differentiate them from letters.”
Posts are optimistic about the proposed changes, but concede they are a compromise. “It provides for a stronger cost orientation and reflects the changing composition of lettermail streams and the increasing number of small packets. As a result, the cost coverage for importing e-commerce items, especially from Asia, can be expected to improve,” says Alexander Edenhofer, spokesperson for Deutsche Post DHL Group.
“It is a compromise and certainly not perfect. However, from Deutsche Post DHL Group’s point of view, this can be considered an important step in the right direction as the new remuneration rates encourage competitive pricing in the growing e-commerce area, while the cost coverage for destination countries will clearly improve.”
However, for some, this change does not go far enough. “Competition is based not only on rates, but also on speed, reliability and other services, such as tracking,” explains USPS OIG’s Piscioneri. “The post-to-post supply chain governed by terminal dues is in many cases still too fragmented and does not seem to fully meet customer needs.”
Right: Paola Piscioneri, director for global data and innovation and research, USPS OIG
In Europe there is a separate remuneration agreement, known as REIMS (Remuneration of International Mails), that was set up to address quality of service concerns. Herbert Götz, director of marketing at the International Post Corporation (IPC), which oversees REIMS, explains: “It is not a treaty like the UPU system. It is an agreement between signatories. There are 26 signatories, all European, but it is open to everybody.”
He says that signatories include most European countries, with some notable exceptions, among them the Netherlands and the UK. “It was set up 26 years ago because the leading postal operators in Europe were unhappy with cross-border mail arrangements. They wanted us to build a system that ensured cross-border mail is considered as important as domestic mail.”
Götz says REIMS differs from the terminal dues system in that posts are remunerated for the entire cost of delivery, which is worked out by using the domestic rate as a proxy and deducting 35-40%, depending on the type of mail. “The most important difference is the quality of service,” he adds. “This is the main reason REIMS was created. Posts are rewarded for better service and posts that provide poor service are penalized. Participants in the REIMS system are always in the high 90% for next-day delivery of received inbound international mail.”
While REIMS works well among those who signed up to it, participating posts still have to put up with the UPU terminal dues remuneration system for deliveries from countries not signed up to the agreement. For countries unable to afford the domestic rates of relatively wealthy countries in Europe, there is little impetus to sign up.
“The key point for remuneration is to have a well-balanced system that takes into account the cost-coverage aspect in the receiving country and the competitiveness in the sending country,” says Marc Paingt, director of international relations at Belgium’s bpost, who has co-chaired the UPU’s Physical Services Committee of the Postal Operations Council.
“We also have to know that some designated operators are mail importers, looking for high rates, others are mail exporters looking for competitive rates, and others still are giving their outbound business to alternative delivery services,” he says.
Left: Herbert Götz, director of marketing, IPC
Outside the bubble
One group unhappy with the current system is private sector providers. They are completely locked out of the system, which leaves them unable to compete with posts paying discounted terminal dues rates. “The rates are extraordinarily low, causing posts in developed countries to lose money. Clearly that would make it challenging for us to compete,” says Keith Kellison, vice president of global public affairs at UPS.
“The UPU uses the term ‘designated operator’ for posts, but the lines continue to blur and it is hard to differentiate between a public postal operator and a private one,” he continues. “A package is a package, whether Deutsche Post, DHL, Royal Mail, Fedex or UPS is carrying it. There should be a level playing field that does not distinguish between posts and private sector delivery companies.”
Kellison says that while UPS recognizes and welcomes the steps taken by UPU at the Istanbul congress, the changes are “modest” and fail to address the many other problems with the remuneration system. “There is the issue of imports that are not declared,” he says. “We have to submit our packages to customs authorities so that duty is imposed, and we are required to provide advance electronic data for all packages entering the USA. That all adds costs. Foreign posts generally do not provide the advance data to allow authorities to impose customs fees and screen for illicit items.”
He also believes the whole system raises serious anti-trust concerns. “You have 192 countries that get together and decide rates based on territorial boundaries. How that passes anti-trust laws is very questionable,” he argues. “That being said, fair competition is good, but if developing countries want to compete and improve their service, they need to build the infrastructure and pay the necessary costs. But forcing foreign posts to lose money so that developing countries can gain market share just does not make sense.”
Kellison’s solution? “The posts should charge the same rates to deliver international packages as they charge domestic shippers. The most obvious way to solve this is to start with the developed countries: Europe, Canada, the USA, Japan and a couple of others, including China, which for some reason is not classed as developed. Do that and you will solve 80% of the issues.”
However, the UPU insists things are changing: “The organization is going in the right direction, toward the provision of universal postal services that are affordable, can strengthen the global postal network and ensure its integrity,” says Linhares. “We must not forget that terminal dues form an international treaty and that the UPU is catering to the needs of developing countries. We should be conscious that these countries need support to develop.”
To read the full version of the article in the January 2017 issue of Postal Technology International, click here.
Article by Richard N Williams
December 2, 2016