Blogs & Comment

The Royal Mail has been privatized, so why not Canada Post? — Larry MacDonald

The U.K. and others are on to a good thing

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Earlier this month, the privatization of the British postal service, the Royal Mail, went ahead with the listing of shares on the London Stock Exchange. This development would seem to strengthen the case for similarly privatizing Canada Post through a listing of shares on the Toronto Stock Exchange.

Many studies and reports over the years have argued for privatization. I made the same argument more than two years ago in “20 reasons for ending Canada Post’s monopoly.” Since then, it has only become more apparent that Canada Post needs a radical makeover.

Email and other forms of digital communication continue to erode the letter delivery business, rendering Canada Post an increasing drain on the taxpayer’s purse. As of mid-2013, the crown corporation is unprofitable and has $1 billion in debt, a pension plan underfunded by $6 billion and negative net equity of nearly $3 billion. In 2008, it was profitable and had no debt, a fully funded pension plan and net equity of $1.5 billion.

Management recently warned that it has only enough cash to last until mid-2014, suggesting that another round of service cutbacks, injection of public funds and hikes in stamp prices could be in store despite previous rounds of service cuts, cash infusions and price increases. Earlier this year, the Conference Board of Canada estimated that without major service reductions, Canada Post will be losing $1 billion a year by the end of the decade: growth in parcel deliveries and junk mail will not be enough to stem the mounting losses on the letter-delivery side.

Privatization will enable Canada Post to raise a great deal more money for financing a lasting turnaround. First, a billion or so dollars could be raised through the listing of shares on the stock market (the Royal Mail floatation raised several billion pounds). Second, it would dispense with the restriction on the amount of debt that can be borrowed by crown corporations. Third, to make the post office attractive to private investors, public funds will likely be pumped into the corporation prior to the initial public offering. In the case of the Royal Mail, the government took over the corporation’s pension plan and covered off the deficit in funding.

The obligation to provide universal postal service to all locations in Canada can be met in other ways than through a state monopoly. The Royal Mail was privatized subject to the condition that it maintains universal delivery under the surveillance of a regulatory body. This imposes a higher cost structure but presumably, a profit-driven entity will find a less costly solution.

As for requiring privately owned companies to adhere to government regulations such as the above, there is nothing unusual about it. Other industries have long operated with similar restrictions—in the Canadian telecom industry, for example, firms can only optimize profits subject to Canadian content rules monitored by the CRTC.

By transferring to the private sector ownership of Canada Post, the federal government can eliminate a major drain on public finances and move closer to the goals of eliminating the fiscal deficit and paying down public sector debt.  Postal employees can also gain. Royal Mail workers received free shares in the initial public offering. They shot up more than 30% in the first week of trading. And if the shares follow the pattern of many other privatizations, they will appreciate more than fourfold over the years to come.

The trend toward privatization of postal services continues to build around the world. The U.K. is only the latest to sign up. Countries that have already gone this route include Switzerland, Italy, Brazil, New Zealand, France, and Germany. And Japan is shortly planning to join the group. There must be something meritorious behind the notion of privatization for so many countries to come on board. It’s about time Canada joined in.

Larry MacDonald is a former economist who manages his own portfolio and writes on investment topics. He is the author of several business books.