Privatizing the post office: The NAPA/Pitney Bowes study on reinventing the retail network

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About three weeks from now, postal insiders and innovative outsiders will convene in Washington DC for the PostalVision 2020/3.0 conference to discuss the future of the Postal Service.  Called “Positioning America for the New Millennium,” the event will focus on “a constructive approach to re-inventing today’s broken Postal Service model for future generations.”

Among the headliners speaking at the event will be David M. Walker, a former Comptroller General, the first President and CEO of the libertarian Peter G. Peterson Foundation, and currently Founder and CEO of the Comeback America Initiative, which promotes fiscal responsibility (by cutting social programs).

Mr. Walker will probably devote much of his talk to discussing the privatization of the Postal Service.  That’s because he is the chair of a five-member panel that the National Academy of Public Administration (NAPA) asked to review a recent proposal on privatization.

The proposal is called “Restructuring the U.S. Postal Service: The Case for a Hybrid Public-Private Partnership.”  It describes a postal system in which the private sector would take care of the “upstream” — the retail and mail processing work — while the public sector would remain responsible for the “downstream” — delivering the mail through its network of “trusted letter carriers,” the “feet on the street,” as the proposal puts it.

NAPA has a long-standing interest in postal matters, and its President and CEO is Dan Blair, a former member of the Postal Regulatory Commission, so it’s not surprising that NAPA would focus on the Postal Service right now.  With funding support from Pitney Bowes, NAPA assembled a panel to subject the proposal to what it describes as a “rigorous evaluation.”

Despite the apparent conflict of interest involved with taking money from a key player in the mail industry, a company that would profit significantly from privatization (as discussed in this earlier post), the NAPA report is officially titled “An Independent Review of a Thought-Leader Concept to Reform the U.S. Postal Service.”

When the panel was first announced, the NAPA website provided brief biographies for the participants, and in the bio for one member of the study team, the review was referred to as “the Pitney Bowes study.”  That bio was subsequently revised and the reference to Pitney Bowes purged.  In the discussion that follows, we’ll refer to the original proposal as the Thought-Leader Concept, and we’ll refer to Mr. Walker’s review of the proposal as the NAPA/Pitney Bowes study.

 

The retail end of the upstream

The NAPA/Pitney Bowes report runs to over 50 pages, but very little of it examines one of the key parts of the Thought-Leader Concept — the privatization of the retail end of the Postal Service’s operations.  All told, there are maybe two pages’ worth of discussion on this topic.

The Thought-Leader Concept says that “the new postal system” being envisioned “will reinvent the concept of retail access for consumers.”  Under the new system, “there will be an explosion of options for the public to conduct postal business.”  You’ll be able to do postal business at retail stores, gas stations, schools, coffee shops, movie theaters, or any other location that is interested and meets USPS requirements.

The proposal also suggests that the Postal Service would continue to operate a small number of retail centers, for locations where no other postal options are available or where it is more beneficial to maintain the USPS offices.

In its review of the proposal, the NAPA/Pitney Bowes study has little more to say about this reinvention of the retail system.  It explains that Contract Postal Units (CPUs) and Village Post Offices (VPOs) are postal operations housed in private businesses, and it provides a few numbers (drawn from a recent GAO report) about how many there are right now.  There’s also reference to the fact that some people have recommended creating a BRAC-like commission to help close facilities (it adds, in bold, “Congressional action would help”).

But that’s about it.  There’s no discussion of how much money privatization of the retail network might save, nothing about how postal services might decline and push away revenues, nothing about how small businesses might suffer, and so on.  We’re just supposed to imagine an “explosion of options” that will make it much easier for people to do postal business.

 

Alternative retail channels

Both the Thought-Leader Concept and the NAPA/Pitney Bowes study suggest that the main vehicle for reinventing the privatized retail network will be CPUs and VPOs.  There’s no reference to Authorized Postal Providers, the much more prevalent alternate access channel, which involves “partnering” with a retail chain so they can sell stamps on consignment.  The Thought-Leader Concept seems to think that these Authorized Providers are a type of CPU or VPO, which they’re not.

In any case, the proposal envisions a retail network consisting of CPUs, VPOs, Authorized Providers, and some government post offices to maintain universal service.  That’s essentially the mix we have now, so when the proposal talks about “reinventing the concept of retail access,” it’s simply calling for far fewer government post offices and many more of the private alternatives.

For the past few years, the Postal Service has been working diligently to accomplish exactly that goal, and it didn’t need a privatization study to get motivated.  The Postal Service has tried all sorts of approaches to encourage people to use alternate retail access channels — like closing post offices, reducing their hours, changing the USPS.com post office locator so the default setting points you to Approved Postal Providers, and running an ad campaign telling people not think of brick-and-mortar post offices when they think of the Postal Service.

 

Retail revenue sources

In spite of all these efforts, post offices continue to be the main source of retail revenues — over 60 percent in 2012.  The only significant and successful alternative is PC Postage, which enables businesses to generate prepaid, electronic postage online.  It currently accounts for about 20 percent of retail (up over 4 percent over 2011).   CPUs, VPOs, and Authorized Providers account for less than 10 percent of retail revenues, and that number is not going to get much bigger anytime soon.

According to a 2012 GAO report, the number of CPUs and CPOs (community post offices) has steadily declined over the past few years.  In 2007, there were 4,026 of them; in 2011, there were 3,586, a drop of nearly 11 percent.

The numbers have continued to fall.  The PRC’s Annual Compliance Determination report (ACD), published a few days ago, has more data on CPUs and other alternate access channels.  The ACD shows that at the start of FY 2012 there were a total of 2,965 CPUs and CPOs; by the end of FY 2012, there were 2,599, for a net loss of 366, a drop of over 12 percent.

The Postal Service is closing CPUs faster than it’s opening them.  They’re much cheaper for the Postal Service than a post office, but they can be difficult to administer, they don’t provide a full range of services, and they don’t generate much revenue.  As this point, according to the PRC’s ACD, CPUs provide only 2.2% of USPS retail revenues, which comes to 0.6 percent of total annual revenues.

As for VPOs, it looked for a while as if the concept presented to the country with such great fanfare back in 2011 might just fade quietly away.  During the first year of their existence, just a few dozen were created.  In many small towns it was difficult finding an appropriate location, and they acquired a stigma because communities saw them as inadequate substitutes for the post office that was closing.

Last year, however, the Postal Service decided that the VPO would be used not as a replacement for a post office that was closing but as a supplement to a post office that was having its hours reduced under POStPlan.  That approach has removed some of the stigma, and the Postal Service has put some energy into creating new VPOs.  There are now 200 of them, and there are plans to set up hundreds more over the coming year.

Still, the amount of revenue that a few hundred VPOs can generate is microscopic in the context of the USPS budget.  They’re hardly worth thinking about as a viable alternative to a vast network of post offices.

While CPUs have been steadily declining, the Postal Service has had much more success in developing its partnerships with Authorized Postal Providers.  There are currently about 70,000 of these access points — in places like CVS, Costco, Office Depot, and supermarkets.  That’s over twice as many locations as there are traditional post offices (about 32,000).

As many authorized providers as there may be, they just don’t bring in a lot of revenue.  According to the ACD, these 70,000 providers account for just 7 percent of retail revenues, or only 2 percent of total USPS revenues.  These revenues are not growing very fast either.  From 2011 to 2012, they increased by just 0.2 percent.

Clearly, the notion that tens of thousands of post offices can be replaced by an “explosion of options” in the private sector needs much more “rigorous evaluation” than the NAPA/Pitney Bowes study has provided.

 

Cost savings

It’s difficult to estimate how much money privatizing the postal retail network would save, but neither the Thought Leader Concept nor the NAPA/Pitney Bowes study even offers an estimate.

The proposal says that in the new system the Postal Service would “preserve its nationwide presence through a slimmed down network of Government post offices.”  There would be “a small number of retail centers, backfilling in those locations where no other postal options are available or where it is more beneficial to maintain the USPS offices.”

“Slimmed down” and “a small number” don’t help much if you’re trying to visualize the new system.  Preserving universal service could require preserving 10,000 small rural post offices.  Is that a small number?

In any case, how much money does closing post offices save?  The Thought-Leader Concept says that under the proposed system, the Postal Service’s total operating costs would be roughly $30 billion per year, i.e., $35 billion less than with the current system.  One might think that a significant portion savings would involve closing post offices and shifting over to the private alternatives.  But that turns out not to be the case.

In September 2011, the Postmaster General told Congress that he planned to review as many as 15,000 post offices for possible closure.  He stated that this step could produce annual savings of $1.5 billion.

Closing nearly half the country’s post office would certainly leave us with a “slimmed down” retail network, but $1.5 billion is just 4 percent of $35 billion.  There must be more savings to be had in reinventing the retail network.

The Postal Service doesn’t produce data that separates the costs of running the retail or window operations in post office from the costs associated with all the processing and handling other work that goes on in the back of the building, so it’s hard to say how much might be saved by closing down the retail network.  During the PRC’s Advisory Opinion process for the Retail Access Optimization Initiative, however, an expert witness cited a couple of estimates for operating the retail network.  One estimate was $5.8 billion; another was $4.5 billion.

In other words, closing 15,000 small post offices could save $1.5 billion, and closing all 32,000 post offices could save three or four times that amount.  Depending upon what that “slimmed down” network looked like, the total savings would be somewhere in between.

Let’s say closing 25,000 post offices would save $3.5 billion. That’s just 10 percent of the $35 billion the Thought-Leader Concept imagines would be saved under the new system.   It hardly seems worth the trouble.  And there would be plenty of that.

The Thought-Leader Concept says that the Postal Service could shed $35 billion in costs by privatizing its retail and mail processing activities, but it doesn’t break the estimate down into the retail and the processing components.  According to this study on the cost of universal service, counter service accounts for 6 percent of total operating costs, while mail processing accounts for 36 percent.  That means the $35 billion breaks down to $5 billion for retail costs, and $30 billion for processing costs.

Reinventing the retail network would therefore not have much of an impact on cost savings.  The more significant change would involve transferring a $30 billion mail processing operation to private companies, such as those that are in the consolidation and pre-sort business — companies like Pitney Bowes.

 

Lost retail revenues

Then there’s the question of how much revenue might be lost if, say, 25,000 post offices were closed.  The Postal Service likes to say that closing a post office doesn’t cause any revenue losses because customers will go to another post office or alternative USPS revenue channel, like CVS or Costco.  But that’s simply not realistic.  If thousands and thousands of post offices were to close, diversion to the Internet would accelerate, and people would be more inclined to use private shippers.

In 2012, post offices brought in about $10.6 billion a year — about 16 percent of total USPS revenues.  Under the privatization scheme, some of that revenue would inevitably disappear, no matter how many new locations “exploded” in the private sector.

The 25,000 post offices we were talking about closing represent nearly 80 percent of the country’s post offices.  If those that remain open are primarily small rural offices left in place to maintain universal service, those 25,000 would account for nearly all retail revenues.

If closing these post offices resulted in revenue losses of 30 percent of that $10.6 billion a year, it would wipe out the $3.5 billion in savings.

And there’s one other minor detail that neither the Thought-Leader Concept nor the NAPA/Pitney Bowes review seems to have considered.  Post offices aren’t just retail operations.  Most of the space in the building is for letter carriers.  Once all the post offices are closed, where are those 200,000 letter carriers going to be home basing it?

Sure, they can be relocated and consolidated into carrier annexes and processing plants, but right now there are just a few hundred of these facilities.  Carriers need to be located relatively close to the communities where they’re delivering the mail, so the Postal Service would still need thousands of facilities.

We already have this infrastructure in place.  Why bother replacing it with a new one, just to privatize the retail business, especially if the savings won’t be significant?

The bottom line is that the retail network runs at a considerable profit.  It costs about $5 billion to operate (give or take a half billion), and it takes in about $10 billion in revenues.  What benefit would there be in handing over a profitable retail business to private companies and leaving the government with the money-losing obligation to provide universal service to small towns?

The Thought-Leader Concept is a classic case of privatizing the profits and socializing the losses, and it shouldn’t be taken seriously as a way to fix what ails the Postal Service.

 

The madness in the method

The NAPA/Pitney Bowes study doesn’t do a cost-savings analysis like the one we’ve sketched out here.  In fact, it takes a rather superficial approach to the question and just assumes that there’s a lot of money to be saved by privatizing the retail network.  It’s not any better informed than the editorials you read everyday saying the Postal Service could fix its problem if Congress would only let it close thousands of post offices. As if a deficit of $40 billion could be fixed by closing a few thousand small rural post offices.

Rather than putting some number crunchers to work on the question, the NAPA/Pitney Bowes panel took another approach.  They assembled a list of ninety postal experts and stakeholders and solicited their views about the proposal.  Some of the participants were interviewed, while others were sent (via email, in at least some cases) a copy of the proposal, along with a letter posing four general questions.

Participants were asked to limit their responses to five double-spaced pages.  All the responses were gathered together, analyzed, summarized, and integrated into the report we now see.  The study is valuable insofar as it provides a snapshot of what many stakeholders and experts may be thinking right now, and it does a decent job pointing to some of the issues and potential problems in privatization.

But such a methodology cannot produce a rigorous analysis of how much money privatization might save.  The study mentions a small handful of reports that were consulted, but it does not delve into the dozens and dozens of reports about the Postal Service’s operations that have been produced by the GAO, the OIG, the PRC, the OPM, the CRS, and the Postal Service itself.

Looking at these reports would have given the NAPA panel a much better idea of what would be involved in implementing the privatization scheme and how much money it might save at the retail end.

While the purpose of the study was to produce a “rigorous evaluation” of the Thought-Leader Concept, it appears that its actual purpose was something else.  The study tests the water on privatization and helps shape the public discourse by making privatization seem more respectable.  It will also give Mr. Walker something to talk about at the PostalVision 2020 conference.

[Image credits: Post Office sketches by Kyle Durrie at Tiny Post Offices]

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