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Policy Framework for Regulation of Courier Services

The monopoly of the Indian postal department over mail delivery is being eroded by a number of private couriers. This article suggests that mail delivery can be made more efficient by putting into place an appropriate postal regulatory regime.

COMMENTARY

Policy Framework for regulatory and operative functions have been separated and the latter function en-
Regulation of Courier Services trusted to a corporative entity while simultaneously establishing a regulator inde
pendent of the government domain. Sec
ondly, the new postal corporate entities
B B Dave are expected to be financially self-support-

The monopoly of the Indian postal department over mail delivery is being eroded by a number of private couriers. This article suggests that mail delivery can be made more efficient by putting into place an appropriate postal regulatory regime.

I am grateful to D Narasimhan and B Gopal Naik of IIM, Bangalore for comments.

Email: bbdave100@hotmail.com

E
stablished in 1854, the postal department is one of the oldest departmentally-run public sector undertakings of the government of India (GOI). Its legislative basis is the Indian Post Office Act, 1898. There are about 1.6 lakh post offices in India out of which about 1.4 lakh are in rural areas. It handles more than 16 billion articles of mail every year. The postal service, which was a part of the undivided post and telegraph department prior to January 1, 1985, was being cross-subsidised from the surpluses of the telegraph wing. After the separation of telecom services, the subsidy is borne by the general budget of the central government.

The de jure legal monopoly of the department, which still continues, has been eroded on the ground by a large number of private couriers who have taken away a good proportion of the high revenue yielding traffic from the stateowned monopoly operator, the India Post.

There is no separation between the owner, operator, and regulator and hence, the department is not flexible to take commercial decisions based on sound business principles. India Post is providing basic services at highly subsidised rates throughout the country under its universal service obligations [GoI 2001]. Recognising the de facto operation of a large number of couriers without rights and obligations imposed by law, a need is being felt within and outside government circles that postal operations in India must be brought under a licensed regime for proper regulation of their activities. For the purpose of providing a level playing field in courier services in the country, there is a case for the gradual corporatisation of the department. The inefficient and financially ailing postal services all over the world have demonstrated a significant turnaround after corporatisation including the US, UK, Canada, France, Malaysia, etc. Firstly, the ing or generating profits through various reforms and adopting best operating practices and technological induction.

I would like to briefly analyse the salient features of the reforms that are required to be carried out in the courier industry in India, i e, the need for establishing a regulatory authority and defining its role and responsibilities in regulating universal services and promoting competition in the industry.

1 Need for a Regulator

It has been widely accepted that the private couriers carry out their activities in high revenue yielding areas [GoI 2001]. Exploiting the loopholes in the age-old Post Office Act, they offer delivery services that extend to all sorts of postal items without any legal authority to do so, whereas carriage and delivery of letters, de jure, is the monopoly of the department of post. It is neither economical nor practically feasible to enforce the provisions of the act. The following are the salient features of the existing Indian courier market.

First, the department is obliged to approach the Parliament for the fixation/ alteration of tariffs of the following types of articles – letters, letter cards, postcards, books, patterns and sample packets, registered newspapers and parcels. These different categories of mail are collected, transported and delivered at uniform tariffs throughout the country as a part of the department’s universal service obligations (USO). On the other hand, the mail articles carried by couriers are not differentiated into comparable categories. They collect, transport and deliver articles irrespective of their contents, weight and size.

Second, the tariffs fixed by couriers are not based on any uniform standard. Therefore, they offer a lot of flexibility in the rates, which the department is unable to do. Third, most of the couriers only concentrate on point-to-point services (mostly major towns and cities) in India and overseas. Over time, small unorganised

january 19, 2008 Economic & Political Weekly

COMMENTARY

couriers like ‘angadias’ have mushroomed in certain geographical areas where they carry articles between two points at rates higher than ordinary letter mail service of the department on the assurance of next day delivery. Although next day delivery is often not achieved, on many occasions they are delivered earlier than a letter mail article sent through India Post. As a result, the customer ends up paying more to couriers but for the inefficient service of India Post.

Fourth, as far as “big players” in the industry are concerned, they are dealing with mostly business-to-business and business-to-consumer mail within and outside the country. As a response to these services, the department launched the Speed Post service in domestic as well as foreign sectors in 1986. It has generally been doing well. However, in terms of total turnover and market share, Speed Post falls far behind the couriers, largely because India Post has not been able to offer an effective and extensive online trackand-trace service at the quality levels offered by couriers and demanded by customers. Though India Post has lately introduced an online track-and-trace service in some domestic sectors, it has not yet stabilised. The quality of service is also a serious issue, which needs to be addressed by setting up strict norms and monitoring them. However, on the tariff front, Speed Post is quite competitive. It is considerably cheaper in the international sector compared to couriers and also offers and online track-and-trace facility to users free of cost called the international postal system service.

The department of post is incurring huge losses on maintaining a very large network of rural post offices. However, they cannot be immediately closed without ensuring a minimum standard of universal service. Hence, the subsidy in this area will continue to be large. We cannot, at the same time, allow the inefficiency built in the operations to continue and adversely affect the performance of the operator. The principal reasons for the inefficiency are understood to be (a) the civil service status of the workforce; and

(b) there is no separate budget for the department and the high costs of inefficient operations are fully subsidised by the

Economic & Political Weekly january 19, 2008

central budget, leaving no incentive for the department to reduce costs by increasing operational efficiency through modernisation and technological induction.

Against this background of growing competition, which is not on a level playing field, the regulation of the entire courier industry, as opposed to management through ownership, appears to be the means by which the government can seek to stay in control as in most countries in the developed and developing world.

2 Postal Regulator

The foremost principle in establishing a regulatory body, say, the Postal Regulatory Authority of India (PRAI) is that it should have a sound legal foundation. Hence, the Indian Post Office Act needs to be overhauled urgently. The regulatory body should be independent of government control and act as advisor to the government on policy issues.

Mandate of Regulator: The regulator should act as the guardian of universal service – the arrangement whereby letters are delivered anywhere in India at uniform and affordable prices. It should also be charged with introducing competition into courier services where it is in the interest of the customers. India Post, the incumbent, still dominates the letter post market, which is delivering the universal service; it can be recognised as the universal service provider (USP) unless some other player bids and qualifies for the same.

Historically, governments have mainly engaged themselves with reform or modernisation of the operator, rather than bringing about institutional changes in the structure of the sector. It has been observed the world over that the national operator’s reform passes through four stages mainly, separation of the postal operator from the telecom operator, conversion to public companies, and privatisation. India separated the two operators about two decades ago. However, unfortunately, it has not yet entered into the next stage.

Once competition exists in the postal sector, the regulation of universal service provision clearly becomes the most important function. The key lies in defining “universal service”. As defined by the European Commission, universal services are defined as concrete services to which a consumer is entitled no matter where he or she lives, i e, in terms of accessibility, quality and affordability. This means that the accessibility, quality and price of these services are regulated ex ante and imposed upon one operator, generally the incumbent. Finances for these universal services come from the sector itself, i e, from the operators active in the sector. For this purpose, the USP has to follow a proper cost accounting system separately for each service.

In addition, there are also “services in the general interest” offered by the Indian post office, which are viewed from the perspective of a national legislator, which seeks to implement public policy objectives such as economic, social or regional development through the historical operator; for example, maintaining the rural post office network for providing services of general interest such as savings bank, money orders, Indian postal orders and other financial services. Finances for these services in the general interest, even under a regulatory framework, comes not from the sector but from public funds. Regulation in the courier sector relates mostly to universal services and should, therefore, be seen as a form of customer protection. However, the USO has an international component also in addition to the definition given above – a guarantee of international coverage.

While there is broad agreement on the main features of universal service – accessibility, quality and affordability – how this can be defined in concrete terms varies from country to country. There is, however, no doubt that the following parameters are commonly associated with USOs: affordable prices, accessibility to postal services for customers in terms of distance, counter facilities or collection/ delivery points, delivery standards in terms of number and frequency of deliveries and categories of postal items, i e, letters, parcels, etc. The “affordable” price can be defined in the form of imposing a “price cap” on universal services. As far as standards are considered, the following examples are cited:

(1) At least one delivery every working day to the home or premises of every individual in India.

COMMENTARY
  • (2) At least one collection every working day from each access point, with conditions like not less than 99 per cent of users are within 500 metres of a letterbox; and at least 95 per cent users within five km of the delivery access point.
  • (3) The regulator will specify standards in terms of minimum percentage of delivery of articles of each type to be achieved by a specific time (see the table).
  • Table: Delivery Targets

    Product /Service Target (%)
    Name of Product/Service End March End March End
    2006 2007 2008
    Letter/parcel mail 90.5 91 93
    Registered mail 95 96 97.5

    Services, which are to be included as universal services, reserved services and market services also need to be identified for the purpose of regulation. The following services can be identified as the USO of the USP, which can be opened gradually to competition: postcards, letter cards, letters, parcels, registrations and foreign post.

    Services like money orders, telegraphic money orders, Indian postal orders (IPO), insured articles, value-payable articles and financial services like savings bank and life insurance services, can be retained under the category of “services in the general interest” and subsidised through the general exchequer directly. However, after being separated from the ministry of finance and after the formation of a separate post bank and insurance company regulated by the respective Reserve Bank of India and Insurance Regulatory and Development Authority regulations, these services can be removed from this category and opened up to competition. Nevertheless, services like printed postcards and competition postcards are generally for business purposes. Similarly, registered newspapers and book-post articles including printed books and periodicals have historically been subsidised for the purpose of dissemination of information. In the modern electronic age, these subsidies are hardly justified. All these services can immediately be opened up to competition as there is no social or equity issue involved in subsidising them. Other services like Speed Post, etc, should be declared as “market services”. It is proposed to exclude any service as a “restricted service” because none of the traditional services are profit making and the intention of regulation is not to monopolise but to open the sector to competition [Department of Post 2007].

    Tools of Regulation: Licences become relevant once a sector is addressed as a whole and can be justified on the ground that (1) the market should be regulated;

    (2) the provision of universal services needs to be legally tied to a political mandate; and (3) money needs to be leveraged in order to finance the universal service. All operators irrespective of the fact whether they are operating within the universal service area or outside should require the “licence”.

    Centre for the Study of Law and Governance Jawaharlal Nehru University New Delhi

    Visiting Fellowships

    Applications are invited from interested scholars for the following positions:

  • 1. One Visiting Professorial Fellowship – The Ford Foundation has instituted a Visiting Professorial Fellowship in Governance at the Centre. This Fellowship is intended to facilitate the participation, in the Centre’s activities, of a senior academic, national or international, who has distinguished her/himself in the priority areas of the Centre. The Centre expects the Visiting Fellow to contribute to its activities by assisting in the setting up of a research programme in the area, in its teaching programme, and in developing seminars/workshops for the policy community.
  • The fellowship is available for two years but may, in special cases, be awarded for one year. The Fellowship is at the level of the salary of an Indian Professor in the UGC scale. Reasonable funds for research, with adequate office facilities, are provided. Travel costs (national/international) to join the Centre are also available.
  • 2. Three Visiting Fellowships – Visiting scholars can spend a period of six months to a year, pursuing research in the broad areas of the Centre’s research foci, which are as follows:
  • Globalisation and governance: institutions of global governance, multilateral institutions, international trade and environmental regimes, and their impact on national sovereignty.

    Democracy and civil society: the role of civil society in deepening democracy and in the processes of governance; accountability and legitimacy of governing institutions; mapping civil society in India; citizenship and human rights.

    Legal framework for development: legal institutions as social and cultural institutions; the political economy of law making; economic efficiency and social principles underlying legal reasoning; the impact of the legal framework and legal processes on the rights, entitlements and social opportunities of citizens; the rule of law, access to justice; the relationship between the public and private sector (including privatisation, regulatory regimes and deregulation), relationship between legal and economic development.

    State institutions and governance: multi-layered governance, including local governance; administrative reform and issues public management; traditional and modern institutions for self-governance, conflict-resolution and the management of natural resources.

    The Centre provides Visiting Fellows with a maintenance allowance of Rs. 20,000/- per month, office facilities, and a possible grant for empirical research. Interested scholars may apply within 10 days of publication of this advertisement.

    Please send your applications with a full curriculum vitae and copies of relevant research publications to the Chairperson, Centre for the Study of Law and Governance, Jawaharlal Nehru University, New Delhi - 110067. E-mail dir_cslg@mail.jnu.ac.in. Website: http://www.jnu.ac.in/cslg. Applicants are requested to submit a hard copy of their applications to the office besides sending a copy on the email.

    january 19, 2008 Economic & Political Weekly

    COMMENTARY

    In the initial two years of the first phase of liberalisation, for example, every company that delivers mail of any description weighing up to a certain limit, say less than 200 grams or costing less than Rs 30, may need a licence from the regulator. A provision to this effect has to be made in the new postal legislation. A similar example can be found in case of the UK post office, where sections 6 and 7 of the Postal Services Act, 2000 passed by the British parliament lay down that no person shall convey a letter from one place to another without a valid licence issued by Postcomm (the British postal regulatory authority) if it is conveyed in consideration of a payment of less than £1 or which weighs less than 350 grams. This condition can, however, be liberalised in the subsequent stages of the opening up of competition. Nevertheless, even at the beginning, operators desirous of doing business within these limits can apply for a licence and compete with the USP. All services for carrying articles of any kind beyond the above-mentioned weight and tariff ranges can also immediately be opened up to competition including Speed Post and other parcel services by making them corporate entities.

    Unbundling of Services

    For the gradual opening up of the postal sector to competition, various services will be required to be unbundled. Initially, competition may be allowed in the field of bulk mailings and consolidation activities only. It will have to fix up a threshold for bulk mailing with certain conditions about the origin of mail, single sender, single premise, etc, for the “bulk mailing” operators. These licensees will collect and sort this mail and hand it over to the USP for transport and last mile delivery. The USP will charge a reasonable amount based on the costs incurred by it for the use of its delivery network by the licensee. Similarly, a licensee with a licence to carry out “consolidation activity” will collect mail from access points, sort and enter into the stream of the USP by paying a fair price for the network usage in return. Operators may be allowed to apply for a licence to cover more than one type of postal business.

    Economic & Political Weekly january 19, 2008

    Finally, from a prospective date after five to six years, all restrictions on entry can be removed.

    Each applicant for a licence should pay a certain application fee. They may be asked to provide the regulator with certain information regarding expected mail volume and prices. Indeed the accessibility, quality and affordable prices must be defined prior to issue of licence to the USP. Issues relating to the cost of access need not be decided ex ante by the regulator but it can be left to the parties to negotiate and only in case of failure to reach an agreement, should the regulator need to interfere. Rule concerning the period of validity of a licence and the rules for the exit of a company should be laid down with adequate safeguards so that the exit does not dislocate the provision of universal postal services. For example, a licence can be issued for a longer time and an operator should be required to give a notice of going out of business considerably in advance to the regulator with a commitment from another player to fulfil the obligation on his behalf at some mutually agreed considerations.

    For “universal services”, tariffs are initially defined politically. In the case of market services, the regulator has to ensure an objective fixation of tariffs and to discharge that duty, the regulator has to ensure that a detailed accounting framework for all the services (reserved, universal and market services) is put in place and monitored. Where the tariffs are initially set, a simple system of price controls, purely political in nature, is followed. However, once the tariffs have been defined, there is still the question of how they are to be increased overtime. Here, the most common approach is the so-called “price cap” (or RPI-X) system, where increases in prices may not exceed the inflation rate (RPI=retail price index) plus or minus a productivity factor, called the “X” factor. This way of fixing prices does not restrict the income of the USO.

    Financing the USOs: In most of the countries like India, the cost of providing USOs exceeds their revenue. It is, therefore, necessary, once the level of universal service is defined, that the additional costs of providing such services are covered. While political authorities generally determine the level and method of financing the universal services, regulators often have the possibility of defining the methods to calculate the costs of these universal services.

    For the Indian scenario, the financing pattern can be as follows: (1) universal services – licence fee from all players in the sector, which will be directly linked to their annual turnover in the field of licensed services; and (2) services in the general interest – direct subsidy from the general exchequer.

    Unique Sector

    The postal sector as a network industry is not comparable to the other infrastructure sectors in terms of physical access requirements. The postal network can be considered as a production chain with some bottlenecks such as address changes, etc. In this case, the regulator may wish to determine access prices taking into account the considerations discussed above (for example, RPI-X or ROR), as well as various cost calculation methods. To create competition in the courier sector, the postal law may oblige the public postal operator to unbundle its service offer. An example is to be found in the German postal act, which provides that other operators should be given the opportunity to use only parts of the postal service and provide other part themselves (for example, collection, pre-sorting and transport back and forth from sorting centres). The public postal operator must, therefore, offer some of its service components with appropriate discounts. It is obliged to conclude partial service contracts with competitors under certain conditions.

    How ever, some aspects of the postal service might be deemed an essential facility with a public economic function. In other words, it might be judged uneconomical to duplicate a distribution network. This would imply that access to the distribution network would need to be regulated not for competition creation reasons but for reasons of public economics.

    References

    Government of India (2001): ‘Fifth Report of the Expenditure Reforms Commission’, ministry of finance, government of India, New Delhi.

    Department of Post (2007): Annual Report.

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