• Multimedia
• Blog
• Subscribe
• What's New
• Contact Us
• Archive

Bookmark

• Topic
  • A
  • B
  • C
  • D
  • E
  • F
  • G
  • H
  • I
  • J
  • K
  • L

  • M
  • N
  • O
  • P
  • Q
  • R
  • S
  • T
  • U
  • V
  • W
  • XYZ

  
  Select the list of topics to display.
• Country
  • A-B
  • C-E
  • F-K
  • L-O
  • P-S
  • T-Z
  • Regions

  Please choose a country or other area, or a Region.
• Publication Type
• Speaker
  • A-C
  • D-K
  • L-R
  • S-Z
• Date
  • • Most Recent
    • Past 7 days
    • Past 90 days

Executive Summary of Study (HTML)

Joint Study on Universal Postal Union Convention Article 43,
Posting Abroad of Letter-post Items
Released by the Bureau of International Organization Affairs
October 6, 2003

UPU Convention Article 43

1.0            Preface

The United States Postal Service is an agency of the United States Government.  Its statutory obligation is to provide universal postal service at affordable prices.  Various private sector firms have advocated the elimination of Article 43 of the Universal Postal Union (UPU) Convention and alignment of terminal dues with domestic postage, asserting that Article 43 constitutes a market allocation scheme and is anti-competitive.  The USPS believes that elimination of Article 43 would threaten its domestic revenue base and its ability to continue to provide domestic rate stability.  The difference in these two perspectives gave rise to studying the relevant issues and the determination that the risk to domestic revenues would range between a 0.7 and 4.7 billion dollar loss.    

2.0            Introduction

An interagency group on postal policy related to the UPU, led by the State Department, the United States Postal Service (USPS) and the Postal Rate Commission, sponsored a joint study to assess the risks of eliminating Article 43 of the Universal Postal Convention adopted in Beijing in 1999.  Article 43 permits a postal administration to charge domestic postage rates for mailings of a customer resident in its territory that have been posted in another country for delivery to addressees within its national territory.  Article 43 provides the basis for minimizing the impact to the USPS (and other postal administrations) of handling remail in the course of honoring the legally mandated universal service obligation.   Inbound international remail is the diversion of mail from the domestic mail stream or from its conventional route to one that benefits from lower compensation paid by foreign postal administrations to the USPS for delivery of that mail.  Article 43 protects against remail by authorizing adjustments to the delivery compensation rates in an attempt to simultaneously make the compensation for it more equitable while reducing the incentive for remail to occur.  Article 49 of the UPU also has an impact on the regulation of remail and will be included as appropriate in this study.

Remail occurs when a customer resident in country A posts mail in country B (either directly or through an agent) for delivery back into country A (ABA remail) or country C (ABC remail).  ABA remail becomes potentially attractive when a gap exists between the revenue that country A receives for domestic postage versus the revenue received under terminal dues from country B.  ABC remail becomes potentially attractive when differences in terminal dues payment levels between country A and B for mail destinating in country C exist (i.e., UPU industrialized versus developing country terminal dues rates). 

This study evaluates the economic impact and non-financial qualitative factors impacting ABA remail, both under the current UPU Convention and under the hypothetical elimination of Article 43.  This study estimates the financial impact on USPS.  Non-financial qualitative factors include such items as international service performance, use of a foreign postal indicia, loss of drop ship options, reduction in the number of entry points, decrease in quality of the mail piece, address correction, and undeliverable-as-addressed for remail.  The primary focus of this study is the following task areas:

• Estimate the current level of ABA remail activity into the US
• Evaluate the potential for ABA remail with the elimination of Article 43 and Article 49
• Effects of Article 43 and Article 49 on remail
• Estimate the financial and non-financial impact on the USPS of the elimination of Article 43
• Estimate of the impact on stakeholders of the elimination of Article 43

3.0            Background

A brief overview of the UPU, terminals dues, and the provisions of Article 43 and Article 49 are needed for the understanding of this study.

3.1        The Universal Postal Union

The Universal Postal Union (UPU) is a specialized agency of the United Nations and defines its mission:

?? to develop social, cultural and commercial communications between all peoples throughout the single postal territory by the efficient operation of the postal services described in the Acts.? *

One of the overarching goals of the UPU is to provide universal and affordable service to send and receive letter post to and from every citizen of every country, including developing countries or unprofitable, hard-to-service locations.  Because of this commitment of service to every citizen, the UPU has designed delivery policies, compensation agreements, and corrective mechanisms to bolster the ability of postal administrations to provide universal service at affordable prices. The mechanism for calculating and administering payments for the delivery of inbound letter post received from other member administrations is called terminal dues. 

* Council of Administration Resolution 10, 1998.

3.2        The Current Terminal Dues System ? Beijing 1999

In 1999, the UPU adopted a two-tiered system for determining terminal dues paid to UPU Postal Administrations that became effective January 1, 2001.  The tiers are distinguished based on whether a country is classified as industrialized or developing.  The compensation provisions relevant to this study are the terminal dues applicable to either industrialized or developing countries posting mail for delivery in the US:

• Industrialized countries pay terminal dues to other industrialized countries based on charges specific to the destinating country with per item and per kilogram components. 
• Developing countries continue to pay the prior UPU flat rate per kilogram for mail between each other and to industrialized countries except as provided under special criteria.

3.3 Articles of the Universal Postal Convention, Beijing 1999

Article 43 is the primary focus of this study, but Article 49 is also considered.

3.3.1     Article 43

Article 43 is the primary mechanism for protecting postal administrations from the potential erosion of their domestic and international revenue streams under the current UPU terminal dues system.  It specifically provides corrective postage adjustments for situations involving ?uneconomic remail,? ABA and ABC. ABA remail siphons mail from the domestic system and posts it overseas as inbound international mail for delivery in the domestic First-Class mail stream.  This activity has the potential to erode a postal administration?s net revenue base when the domestic rates for letter post are higher than terminal dues, creating an arbitrage situation that is often the case for mail destinating in industrialized countries.

ABC remail becomes attractive to remailers due to arbitrage opportunities caused by the two-tier nature of the current terminal dues system.  This activity has the potential to erode a postal administration?s international revenue base by reducing terminal dues receipts. The focus of this study, however, is ABA remail.

Recognizing the potential loss of revenues to postal administrations, Article 43 allows the collection of additional postage for the delivery of items deemed to be ABA or ABC remail.  If payment of the required additional postage is refused, an administration can deny delivery of the mail, return it to the posting country, and collect redirection costs. 

For ABA remail, Article 43 allows domestic postage rates be assessed for similar mail receiving similar handling and service.  In the case of the USPS, the appropriate rate is that of First-Class Single Piece mail.  For ABC remail, Article 43 permits an adjustment equal to the maximum of either 1) 80% of domestic postage rates or 2) an amount based on the same parameter values as the bulk mail option, but applied only to the particular remailing.

3.3.2 Article 49

Article 49 governs the terminal dues charges for a developing country posting mail for delivery by an industrialized country.  Article 49 provisions that might affect the compensation for remail include:

• The Revision Mechanism allows an industrialized country to charge developing countries a revised flat rate per kilogram derived from a formula with per piece and per kilogram components for mail flows exceeding 150 metric tons per year and when the number of items per kilogram is over 21.
• The Bulk Mail Option enables an industrialized country to charge developing countries per piece and per kilogram terminal dues rates due to it from other industrialized countries on shipments by single mailers exceeding 1,500 pieces in a day or 5,000 pieces in a two-week period.
• The System Harmonization mechanism enables an industrialized country to charge developing countries the same terminal dues rates due to it from other industrialized countries for mail volumes exceeding calculated thresholds specific to the sending country.

4.0        Study Structure

This study was designed to collect and validate information from sources of data related to the current or future use of remail. Information from internal USPS organizations and data systems, large mailers, external data systems, and organizations developing and/or implementing policies that govern the movement of international mail are the basis for the conclusions and findings in this study.  The following steps and data sources were used to gather and validate remail data to satisfy the objectives of this study:

• Analysis of internal USPS data systems
• Interviews with USPS personnel
• Interviews with external organizations including the Universal Postal Union and PostEurop 
• Field visits to the International Service Centers in New York City and Dallas, Texas
• In-depth interviews with 12 industry experts
• Hybrid Focus Groups conducted with 25 mailers
• Web based Mailer Survey of 415 high volume mailers
• Development and execution of a sophisticated forecasting model (Remail Impact Model ? RIM) that incorporates results of a Conjoint Analysis of the Mailer Survey Data
• Expert Panel composed of 6 senior industry experts and prominent business partners to validate the major study findings
• Final Report capturing and reporting all the pertinent data collected by Battelle and presenting the findings and conclusions supported by the empirical study data

Each step in the study was designed to build on and validate the data collected in the previous study activity.  For example, in-depth interviews conducted with mailers provided data necessary to construct a more precise and targeted mailer survey.  Initial data gathering activities provided data for subsequent use in the RIM model and Mailer Survey design activities.

5.0            Summary of Findings

The study findings are summarized as follows.

5.1        Current Level of ABA Remail Activity into the US

Based on the following activities we concluded that there is no significant volume of ABA remail currently entering the US and ABA represents a minimal impact on USPS revenue:

• Interviews with postal personnel (International Business Unit, Postal Inspection Service, Legal Department, and International Service Center acceptance and operations managers) identified some minor occurrences of remail over the past fifteen years.
• Observations of the operations, acceptance, and statistical programs units at the International Service Centers located in New York City and Dallas, Texas, identified some minor incidences of ABA and ABC remail.
• Results of the In Depth Mailer Interviews, the Mailer Survey, Focus Groups and the Expert Panel indicated that there is no significant current ABA remail activity.

5.2            Potential for ABA Remail with the elimination of Article 43 and Article 49

During our mailer surveys and focus groups, a cross section of large mailers were presented scenarios that postulated an international market place where no restrictions exist on ABA remail.  The following findings resulted from the Mailer Survey and Focus Groups:

5.2.1            Propensity to Remail

• Roughly one-third of the major mailers surveyed indicated they were likely to engage in remail for one or more classes of mail within 5 years of the removal of remail prohibitions.  Propensity to remail was somewhat varied across mail classes, with 23% First-Class, 35% Standard A and 42% Periodicals mailers, characterized as ?likely to remail?.
• Mailers that indicated they would be likely to remail (absent restrictions) tend to be higher-volume mailers, with greater numbers of employees.  Additionally, companies that operate outside of a local scope, particularly those that have a physical presence in foreign countries, tend to be more favorably disposed to the concept of ABA remail.  In comparing likely remailers with those not likely to remail, there is not a strong difference in the distribution of remailers within profit and non-profit organizations.
• In general, First-Class and Standard A mailers that send advertising mail appear to be more likely to consider ABA remail than those sending their mail for other purposes.  Companies that currently engage in worksharing (particularly Standard A and Periodicals mailers) are also more prone to consider remailing.  Additionally, companies that send Standard A or Periodicals mail outside of their state have a greater tendency toward remail.

5.2.2     Time Frame for Remail

Mailers that are likely to remail expressed a degree of caution with respect to the timeframe within which they would engage in the practice (absent restrictions).  Only 14% indicated they would begin remail within the first six months.  Over one-half (62%) indicated they would initiate remail within the first year and virtually the entire group indicated they would engage in remail by the end of the second year.

However, it should be noted that the Expert Panel expressed reservations regarding the two-year timeframe. Rather, they felt that it would take longer for mailers to adopt the practice of remail. They indicated that the first two years would probably be a period of experimentation and mailers would adopt a wait-and-see attitude carefully gauging the reaction of the USPS to remail.

5.3        Effects of Article 43 and Article 49 on the Propensity to Remail

The effects of Article 43 and Article 49 on the propensity to remail were determined by data obtained from the Mailer Survey and Focus Groups.

Table 1 indicates Article 43 provisions are perceived to be the most effective deterrent to ABA remail; 69% of the mailers that indicated they would be likely to remail perceived this restriction to be a ?strong deterrent, that hardly any mailers would attempt to circumvent.? 

Table 1  Perceived Effectiveness of UPU Provisions Among Likely Remailers

Of the three provisions of Article 49, the Bulk Mail Option is perceived to be the strongest. However, each of these three UPU provisions are perceived to function as strong deterrents by less than half of mailers; the majority of mailers believe that some companies would attempt to circumvent them.  More importantly, as indicated in the qualitative interviews, they wonder how these restrictions could be enforced.  The harmonization mechanism and revision mechanism are viewed as being particularly ineffective.  Between one-third and one-half of likely remailers indicated that they would still be highly likely to engage in remail, even with these prohibitions in place and strictly enforced.

While Article 43 and the Bulk Mail Option are perceived by mailers to be the most effective deterrents to remail, they are difficult and costly to implement.  Our field observations indicated that the System Harmonization Mechanism would be relatively easy to implement at a reasonable cost, and has the potential to significantly dampen remail activity.  Section 7 provides an in-depth assessment of the effectiveness of these three mechanisms.

5.4            Estimate of the financial impact on the USPS of the elimination of Article 43

The financial impacts of the elimination of Article 43 were determined by combining data from the mailer survey conjoint analysis with financial data contained in the RIM simulation model.  A series of financial scenarios were produced revolving around such factors as the level of domestic USPS postage, the SDR (Special Drawing Rights) conversion rate, the likelihood of bulk mail detection, the cost of processing mail in the domestic USPS system, UPU terminal dues and other costs.  These scenarios, and the assumptions they are based, can be reviewed in depth in Section 6 and Appendix 13.

The results of four core remail scenarios are presented in Table 2.  These four scenarios represent Battelle?s best estimates of the impact of remail in an unrestricted environment (no Article 43 or 49), and an environment where Article 43 has been eliminated but the Article 49 System Harmonization Mechanism is fully enforced.  These scenarios are varied to take into consideration the use of domestic costs (CRA) of processing and delivery of inbound ABA remail versus the use of international costs (ICRA) for the processing and delivery of the same volume of ABA remail.

Alternative scenarios varying the costs of handling ABA remail are presented because cost estimates specific to remail are not available historically (because remail is not widely observed to occur) and because the available proxies for such costs have strengths and weaknesses. 

ICRA costs are for aggregate inbound air letter-post, but letter-post includes all shapes of mail as well as non-business-generated mail.  Presumably, remail would be business-generated and thus tend to have better address hygiene than the average mix of inbound letter-post.  Furthermore, since the arbitrage opportunities for ABA remail are greatest for light weight mail tendered by developing countries, the shape mix for such remail might be skewed toward letter and card shaped mail rather than flats and packets.  For these reasons, ICRA costs may overstate the handling costs of ABA remail. 

The alternative cost assumption uses CRA metered First-Class letter costs as a proxy for ABA remail.  This choice is consistent with the treatment of mail migrating from workshared categories to non-workshared categories in R2000-1.  The marginal costs are lower than the ICRA costs, but may not include all of the processing steps and costs required for inbound Foreign Origin mail and does not account for potentially different productivity levels for ISCs relative to domestic-only facilities.  Therefore, the CRA costs may understate the handling costs of ABA remail. 

Thus, the two alternatives are likely upper and lower bounds for costs of handling remail and present a balanced view of the costs associated with processing remail.

The Core Remail Scenarios in Table 2 yield the following results:

• The impact on USPS domestic revenue for the unrestricted scenarios ranges from a low of  $3.0 billion to a high of  $4.7 billion in lost revenue.

• The impact on USPS domestic revenue for the scenarios with full execution of the System Harmonization Mechanism ranges from a low of $.7 billion to a high $1.5 billion in lost revenue.

Table 2  Summarization of Core Remail Scenarios (billions)

Baseline using ICRA Costs								Alternative using ICRA Costs
System Harmonization (SH)			$0.9					System Harmonization		$1.5
Unrestricted (UR)			$4.1					Unrestricted		$4.7
Baseline using CRA Costs								Alternative using CRA Costs
System Harmonization		$0.7						System Harmonization		$1.1
Unrestricted		$3.0						Unrestricted		$3.5

5.5        Impact of Non-Financial Factors

The potential for remail under several scenarios, each highlighting a particular non-financial remail characteristic, was estimated by applying the Remail Impact Model (RIM).  Each RIM scenario had an appropriate and specific set of assumptions.  Most of these scenarios were developed using characteristics of remail that were identified in the Mailer Survey conjoint models.

Two remail features, service levels and the use of foreign postal indicia, are viewed as having the largest effects among the alternatives.   The net revenue effects on the USPS range from approximately 30% more than baseline losses for comparable service levels to 10% more for US indicia. 

5.6            Estimate of Impact on Stakeholders on the elimination of Article 43

The proposed elimination of Article 43 will have differing financial, service and other impacts on a variety of stakeholders.  These impacts were validated by members of the Expert Panel and are presented in Table 3.

Table 3 indicates that the USPS and its business partners would stand to lose substantially, as would single-piece (and other) mailers who would need to bear the cost of commensurate rate increases.  Business mailers, privatized foreign posts, developing countries' postal administrations, and other USPS competitors would stand to gain the most: all at the expense of the USPS and those mailers not taking advantage of remail opportunities. The elimination of Article 43 and/or Article 49 were of concern to members of the Expert Panel because of the potentially adverse effect on the ability of the USPS to continue to provide the full range of mailing and delivery services that the Expert Panel members currently expect and heavily rely upon.  It was reasoned that losses in domestic revenues due to remail would force increases in domestic postage rates in order to meet the Service?s revenue requirement.

Table 3:  Effect on Stakeholders of Removing UPU Provisions

Stakeholders	If Only Article 43 were Removed	If Both Article 43 & 49 were Removed
Large Business Mailers	Minimal effect	Gain (F*)
Small Business Mailers	Small gain (F)	Gain (F)
Single-Piece Mailers/Mail Recipients	Small loss (F, S*)	Loss (F, S)
US Postal Service	Loss (F, S,)	Loss (F, S)
US Postal Service Business Partners	Small loss (F, S)	Loss (F, S)
Foreign Postal Administrations ? Developing Countries	Small gain (F)	Gain (F)
Foreign Postal Administrations ? Canada	Gain (F)	Small gain (F)
Foreign Postal Administrations ? Other Industrialized Countries	Loss (F)	Loss (F)
Foreign Postal Service Business Partners	Gain (F)	Gain (F)
Foreign Privatized Posts	Gain (F)	Gain (F)
Universal Postal Union (UPU)	Small loss (O*)	Loss (O)
US Postal Service Competitors	Gain (F)	Gain (F)

* F = Financial Impact, S = Service Impact, O = Other Impacts