Revision of the Terminal Dues Payment System of the Universal Postal Union for the Years 2004 and 2005

At the meeting of the Postal Operations Council (POC) of the Universal Postal Union (UPU), to be held in Bern in mid-April, a decision will be made on the UPU system of terminal dues to be applied in mail exchanges between industrialized countries during the years 2004 and 2005. Several options have been developed by UPU's Terminal Dues Action Group, and these will be considered by the POC during its meetings.

Attached is a draft position paper on this issue that has been developed by the U.S. Postal Service following discussions with the Department of State. The paper gives the background to the current terminal dues issue and makes a recommendation for a U.S. position.

This issue will be discussed next at meetings of the UPU Terminal Dues Action Group on April 4 and 11, 2002, and by the UPU Postal Operations Council during the week of April 15, when a decision will be made on this issue. Comment on these proposals is welcome. It may be directed by e-mail to Neil A. Boyer of the Department of State’s Bureau of International Organization Affairs, at boyerna@state.gov.

Draft U.S. Position Paper Regarding UPU Terminal Dues

Issue

Terminal dues are the payments made by one postal administration to another for costs that the destination country incurs in delivering inbound international mail. The 1999 UPU Congress, held in Beijing, adopted a revised UPU terminal dues system, which went into effect on January 1, 2001. This is a two-tier system, with one structure for developing countries (DCs) and another for industrialized countries (ICs).

Under this revised system, terminal dues paid by developing countries are set at a flat worldwide rate of 3.427 SDR per kilogram. Rates paid by industrialized countries to other industrialized countries are based on 60% of the domestic 20-gram priority letter tariff in the destination country. The IC system, which is more cost-based than the previous terminal dues system, applies to the years 2001-2003.

Envisioning further modification to the global terminal dues system, the Beijing Congress authorized UPU’s Terminal Dues Action Group (TDAG) to give careful study to the system approved for 2001-2003 and to make recommendations for the 2004-2005 terminal dues system that will apply to exchanges between industrialized countries (ICs). The TDAG, through various subsidiary bodies and following many meetings, will make a proposal for a new system to the Postal Operations Council (POC), and the POC, at its meeting in April 2002, will make a decision on the system to be utilized for 2004 and 2005. The TDAG will then make recommendations in October 2002 for the general terminal dues system that will apply to all countries in 2006 and the years thereafter. The decision on which system will apply in those years will be made by the next UPU Congress, planned for Abidjan, Cote d’Ivoire, for 2004.

The immediate issue is which terminal dues system will be approved by the Postal Operations Council in April 2002 for exchanges between industrialized countries in the years 2004 and 2005.

For the 2004-2005 IC terminal dues system, the Beijing Congress instructed the POC to determine the final percentage of the tariff appropriate to each destination industrialized country, in line with the relations between the costs and tariffs of each country. The Congress also asked that the TDAG determine quality of service targets and a measurement system that could be linked with terminal dues, so that the amount of terminal dues payable to a destination country could be adjusted according to whether service quality standards were being met.

The majority of the work on the IC system over the past two years was carried out in two of the six TDAG project teams: Letter Post Pricing (LPPT), chaired by Switzerland, and Quality of Service Link (QoS Link), chaired by Finland. A joint meeting of the two project teams was held in Rotorua, New Zealand, from February 5 - 8, 2002 to work out proposals for consideration at the April 2002 meetings of the TDAG, on April 11, and the POC, on April 15-19. Seventeen countries attended the New Zealand meeting (15 ICs and 2 DCs), and five different options were considered.

The first three options were from the December meetings of the LPPT and QoS Link Project Teams. All three options were based on different terminal dues rates for three separate formats of mail (letters, flats and packets) and a REIMS linearization formula to calculate the rates. (REIMS is the name of the terminal dues system currently applied among 17 Western European countries. Linearization means the method used to convert domestic tariffs into "per item and per kilogram" terminal dues rates.) The percentage of tariff proposed for 2004 and 2005 varied from 60% to 70%. Under these proposals, a cap would be applied to annual increases in the terminal dues for destination countries. The cap would be either 10% or 20%.

Prior to the New Zealand meetings, Sweden submitted a proposal (the fourth option) calling for a less costly and less complicated system than the first three proposals. Sweden's proposal called for (1) the percentage of tariff to increase to 62.5% in 2004 and 65% in 2005, (2) no separate rates for different mail formats, and (3) a more simple approach to linearizing tariffs (based on 20 gram and 1000 gram domestic tariffs).

New Zealand then submitted a proposal (the fifth option) that also represented a more moderate change to the current IC system, with the percentage of tariff set at 61% in 2004 and 62% in 2005. The proposal called for continuing the current 20-gram methodology to linearize tariffs and cap increases of no more than 10% per year.

Common ground was found on four major elements of the proposals:

1. Service: Terminal dues rates will be based on Airmail / Priority / First Class service. There will not be separate rates for non-priority or surface mail.
2. Basis: Terminal dues will be based on a percentage of domestic priority retail tariffs. Other commercial tariffs will not be taken into account for the calculation of terminal dues.
3. Format: One terminal dues rate will apply across all formats combined. There will not be separate rates for each of the three formats (letters, flats and packets).
4. Rates: Terminal dues will be paid on a per item and per kilogram basis (as in the current system).

However, the views of the countries were divided on three other major elements of the proposals:

1. What methodology to use to linearize domestic tariffs (REIMS or the current 20-gram methodology used in the UPU)? (The REIMS linearization formula takes into account 13 different domestic tariffs of each country to calculate per item and per kilogram terminal dues charges, using complex regression calculations. The current 20-gram methodology used in the UPU converts the 20-gram domestic tariff into per item and per kilogram terminal dues rates.)
2. What percentage of tariffs to apply?
3. What percentage of a cap increase would apply each year?

In the absence of agreement on these points, participants in the New Zealand meeting decided to send to the TDAG and the POC in April 2002 different options on these three elements. These are summarized in the chart below. Option A was favored primarily by the European countries that support the REIMS system, and Option B was favored by the lower cost ICs outside Europe, by some European countries and by the DCs that attended the meeting.  

Given the differences between the participants on these two items, a possible compromise option was discussed near the end of the meeting that would use the current 20-gram methodology and would set the percentages of tariff at 63% in 2004 and 66% in 2005, with a cap increase each year of +12.5%.

The basic terminal dues charges as calculated above would be adjusted with financial incentives (ranging from 2.5% to 5%) and penalties (ranging from 1/3% to 5%) based on quality of service performance results measured against certain quality targets. Inbound international mail to all ICs will be measured using transponders in test letters with extensions of the current UNEX diagnostic monitoring system run by International Post Corporation (IPC). The mail will be measured against the domestic delivery standards (J+1 (day of arrival plus one day), J+2, J+3, etc.) of each IC. Under the plan being proposed by those convening in New Zealand, all ICs (except Greece and Spain) must meet an 85% on-time target in the year 2004 and an 86% target in 2005. Greece and Spain will have targets of 75% in 2004 and 78% in 2005 as their current domestic performance is considerably below 85%.

The financial incentive payments will be as follows:

• A 2.5% increase in terminal dues (over and above the rate that is eventually established) payable to the country of destination as an incentive to that country to participate in the monitoring system;
• An additional 2.5% increase in terminal dues payments if a country meets its quality target.

Penalties of up to 5% of terminal dues payments will be applied if the quality target is not met. A sliding scale penalty system will be used, whereby a country will lose 1/3% of its terminal dues payments for every 1% under target. For example, with an 85% target:

• If actual quality performance is 82%, the country will lose 1% of its terminal dues
• If actual quality performance is 70%, the country will lose 5% of its terminal dues.

Even after applying the financial incentives and the penalties related to quality, the terminal dues rates for ICs cannot exceed the cap rates that are proposed (+10% or +20% per year), nor fall below the current floor rate of 0.147 SDR per item and 1.491 SDR per kilogram that was set by the Beijing Congress for the period from 2001 to 2005.

The U.S. Postal Service has done a preliminary impact analysis on USPS international rates as regards the "ultimate impact" of Option A vs. Option B, assuming that all terminal dues charges allowed to a destination country under the new system are fully passed through to mailers. The increases shown below are the possible U.S. international postage rate increases by product category to major destinations. The first two, Japan and Germany, have very high domestic postage rates; the latter two, Great Britain and Australia, have lower domestic rates. This impact analysis does not take the quality of service incentives or penalties into consideration.

(IPA is International Priority Airmail, a USPS product primarily consisting of bulk airmail letters; ISAL is International Surface Air Lift, primarily consisting of bulk economy letters; the Publishers category primarily consists of magazines, newspapers and journals.)

A yearly cap increase for IC rates will be either a 20% increase per country per year (Option A) or a 10% increase per year (Option B). Applying the Option A proposal with a 20% cap to the impacts shown above for ISAL to Japan would mean that it would take four years to reach the full 70% of tariffs allowed under that proposal. Applying the Option B proposal with a 10% cap for ISAL to Japan would take five years to reach 65% of tariffs. Option B thus mitigates the impact of sharp rate increases on U.S. mailers.

The proposals under consideration must be evaluated by UPU member states in light of the principles that have been adopted by the CA, POC, and TDAG for the future UPU terminal dues system. The five main principles are:

1. Support universal service obligation (USO) provisions in the UPU Convention;
2. Limit negative impacts on customers and members, particularly in DCs and low cost/rate ICs and limit the duration of the transition period;
3. Be consistent with member requirements, including any applicable WTO-compatible solutions;
4. Avoid arbitrage;
5. Take account of customer input and other stakeholder input.

The Option A proposal focuses primarily on the coverage of all or most costs for the destination country and appears to be incongruous with many of the principles adopted by TDAG, POC and CA. The proposed terminal dues charges would result in very large cost increases for items mailed to countries with high domestic postage rates (ranging from 0% up to well over 100%). The elasticity effects on the IC-to-IC system in the near term, and the overall system in the longer term, must be taken into account.

Due consideration must also be given to the needs of DCs and the need for a feasible transition model that can produce a reunified terminal dues system for DCs and ICs beginning in 2006. The arbitrage gap between the two systems could become too large if IC terminal dues increase too much and too fast, and DCs might then be unwilling to join in a unified system because of economic benefits to them from the existing system. The new IC rates will already apply to DCs in 2004-2005 for bulk mail and for mail under the System Harmonization Mechanism.

The UPU Postal Operations Council in April 2002 will approve a new terminal dues system for industrialized countries to cover 2004 and 2005. "No change" is not one of the options. The United States has strongly supported a terminal dues system that is more closely tied to actual costs, and it has been working to minimize and in time eliminate the two-tier system between ICs and DCs.

The U.S. believes that Option B is the more reasonable way forward, offering a moderate and feasible transition toward country-specific terminal dues charges for all countries. This position takes into account the requirements of national postal administrations to provide universal postal service, the requirements of the mailers, and it appears to offer more realistic possibilities for DCs to transition into the new system beginning in 2006.

If absolutely necessary, U.S. negotiators could give further consideration to the "compromise option" that has been put forward. However, IC terminal dues already have increased more than 35% to destinations with high postage rates over the last three years. A further 20% increase over the next two years (Option B) would most likely be preferred by U.S. mailers, rather than a 25% increase (the possible compromise).