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Tendering Universal Service Obligations in Liberalized Postal Markets

An Outline of Thought

Christian Jaag University of St. Gallen and Swiss Post

Urs Trinkner University of Zürich and Swiss Post

GPREN Postal Research ConferenceApril 28th 2008

University of St. GallenUniversity of Zürich

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Introduction

• Tendering is often used to confer to someone – a right (e.g. to use a certain spectrum for mobile

telecommunication)– A duty (e.g. to build a tunnel across the alps)In these cases, the winning party usually operates ina well defined market environment.

• Recently, tendering has also been used to assign universal services, e.g. in telecommunications.What will the market environment be?

• In the postal market Tendering of postal USO envisioned in Germany, Netherlands, Switzerland.

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Public Procurement

Public provision Contracting

TenderingNegotiation

Definition of a package of duties and rights, possibly including exclusivity

Subcontracting

TenderingNegotiation

Public or private provision

Public need

Tendering / negotiation

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Issues with Universal Service Provision

• Allocative options– Exogenous choice– Beauty contest– Tender / reverse auction

• Distributive options– Ex ante compensation (based on estimated cost)– Ex post compensation (based on „true“ cost)

• Goal: Efficient provisiona) By most efficient operator selection problem b) With most efficient technology incentive problemc) At the lowest possible public cost transfer problem

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Tendering USO will solve all problems…

Why?It applies market forces where a market would otherwise not exist „competition for the market“

Why not?Competition has to be well designed to workproperly…

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Simple Case: Homogeneous Operators

• Winner‘s curse: The operator who underestimates the cost the most wins the auction High risk taken by bidding operators

• If operators realize this, they ask for a high price!• If operators do not realize this: Renegotiation!

Given its „design cost“, USO tendering is expensive;the transfer problem remains unsolved.

True cost no selection/ incentive problems

Cost estimates

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The Net Cost of Providing Universal Service

The net cost of providing universal services depends on

• Universal service provider (efficiency?)• Competitors (strategy)• Regulator (network access, labor market)• Technology• Consumer behavior / preferences

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More realistic case: Heterogeneous Operators

Tendering solves the incentive problem.How important is thea) selection problem?b) transfer problem?

a) large if technology is „volatile“b) large if competitive/regulatory risk is high

True cost (operator-specific)

Cost estimates

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Contract Design – Dimensions of US

• Ubiquity– Collection– Delivery– (Sorting)

• Quality– Frequency of Delivery– Timeliness

• Price– Uniformity– Level (affordable, moderate, reasonable)

Cost

Pre

dic

tabili

ty

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Contract Design – Trade-Offs

• Duration– Long-term contracts for investment incentives– Short-term contract for technological flexibility

• Level of Aggregation– Global approach for economies of scale and scope– Disaggregated approach allows for yardstick competition

• Concreteness– Detailed contracts to avoid renegotiation– Openness allows for commercial/technological flexibility

• Ownership of Postal Operators– Fairness calls for full privatization– State ownership facilitates governance

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Conclusion

• Tendering is a potentially powerful tool for efficient universal service provision.

• There are fundamental issues to be considered, e.g. that tendering introduces new risks.

• Trade-offs in design hard to solve.

• Do we know what we are doing?

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Thank you.

Christian JaagSwiss PostRegulatory and International AffairsViktoriastrasse 213030 BernChristian.jaag@post.ch