Observations About Difficulty Of Government Reform

Twice in the past three weeks I have been in Europe to meet with key mailing industry stakeholders to discuss postal issues. During the last week, the European Union has again considered postponing the effective date for full market opening from 2009 to 2011 for many countries, and to 2013 for many others. This reform process was started with a directive issued in 1997.

Why has it been so difficult? Postal issues are indicative of challenges governments all over the world have in effecting fundamental reform:

• While the broader public may benefit, the benefited individuals and businesses are focused on many issues. Those who might be harmed in the short term, in this case, postal workers, are highly focused, well-organized, and often very militant. They will react far more negatively to reform than the benefited public will act positively. Therefore, in the short run, elected officials find reform very risky.
• Competition, privatization, or other reforms are often disruptive in the short run, but beneficial only in the longer term. Politicians are much more likely to think in the short term because election cycles are relatively short.
• The disruption when reform does not work perfectly, which is often the case, is usually a highly-visible media event, whereas improved service quality does not create the same media opportunities.

The U.S. actually made some good decisions in effecting postal reform. We left a great deal of discretion to an independent regulator, and took a great deal of the heat from elected officials. Europe, on the other hand, has issued broad guidelines, but has left postal reform squarely in the hands of elected officials and regulators in each of the member countries. Some countries have dealt with more of the issues through the decisions of elected officials; others, like the UK, have had more active regulators.

In the UK, the market was opened to full competition in January, 2006. Royal Mail lost significant market share in terms of direct access to mailers, since many bulk mailers now deposit their mail with consolidators. While the Royal Mail continues to get some revenue for the mail that consolidators deposit downstream into its network, it has lost significant revenue in so short a time period that it has not been able to reduce costs at a proportionate rate. It decided to make changes to help it be more competitive, but is now experiencing a series of strikes from the Communications Workers Union. I would hope for a negotiated solution, but one thing is clear: the outcome cannot result in other postal services shrinking from the reform that has to take place.

In other markets, governments are experiencing great difficulty confronting reform, particularly in Southern Europe. While France is committed to opening its market in 2011, the market opening was pushed back from the 2009 deadline set forth in the 2nd directive.

Germany may open its market as early as 2008, but the rules governing that market are still unsettled to a degree because Deutsche Post has demanded an industry-wide minimum wage standard to level the playing field among all competitors.

Many national postal services are far more diversified than they were a decade ago, and are still not very profitable in the non-core businesses. If these postal services were publicly-held companies, or if they were in fully competitive markets with effective competition law enforcement, or if governments imposed financial discipline and accounting transparency, much of this diversification would be stalled or even reversed.

As TNT has become truly publicly-held, it has divested the logistics and the mailroom management businesses, and has made a more focused effort to define its core competencies. I believe all the major postal services will, over time, develop more focused and integrated business models than they have today. I also believe that we will see more partnerships emerge with private sector organizations that will reshape the industry and create a more vibrant sector.

However, given how long this has taken and how difficult it has been, it is clear that governmental reform is an extremely challenging task. For companies trying to do business with government during a period in which reform is contemplated or underway, they will find risks to be much higher than those they face in selling to private sector customers.

For example, technology suppliers have multiple choices on how to allocate research and product development dollars. The continued postponement of dates of any government reform initiative in any sector creates a level of risk that diverts development of best-in-class solutions away from government, particularly from smaller technology suppliers. For projects that require payment and performance bonds, the bonding company costs increase as project risk increases. I have also noticed specifically in the transportation arena that constructing transportation infrastructure has gotten astronomically more expensive with any project delays because of the fast-escalating cost of commodities like steel, nickel, and aluminum, oil-based plastics.

Both elected and appointed officials need to understand that predictability and speed of execution are extremely important in government reform projects, and that, even though the reform effort can theoretically be improved by slowing it down or modifying it, these changes in timing and direction have their own negative unintended consequences.