Volume 17, Number 4 Article by Prof. V Ranganathan December, 2005
Indian Postal System: Challenges Ahead :
With the Internet revolution posing the threat of making the letter mail obsolete, postal monopolies throughout the world are undergoing restructuring and/or privatisation. The ubiquitous post office, in Japan and India particularly, has also doubled up as a bank, exploiting the economies of scope of its vast number of branches and network, and mobilising savings. Prime Minister Koizumi won the recent election on the plank of postal privatisation, with the aim of better utilising the deposits of the banking arm of the Japan Post through the market, rather than through ministerial allocations. Many other countries have successfully privatised their national postal monopolies.
Post, like Electricity and Telecom, is a network industry. Such industries have some common properties – they are natural monopolies, and therefore are subject to similar regulation and the prospect of unbundling to explore the possibility of competition in erstwhile monopolies. Prof V Ranganathan of IIM Bangalore has been involved in research in the electricity and telecom sectors, and the postal system is a natural extension of his research interests.
India Post (IP) has been witnessing a decline and fall both absolutely, in terms of its own lofty standards, and relatively, falling behind its private sector and international competitors who have chipped away the courier market, and in some specific routes even the letter mail segment. Except for foreign mail and Speed Post, every other service is incurring a loss. The loss in turn is constraining the managerial autonomy of IP, with all major financial decisions being left to the Finance Ministry. Worryingly, IP is facing the apparent paradox of falling demand coexisting with low prices even in its subsidised Universal Service Obligation (USO) segment, like post cards and letter mail. In order to promote its Speed Post IP is cannibalising its letter mail market, by delivering normal mail inordinately late. In its quest for commercialisation, it is eroding its own good reputation and good will in its traditional areas, letter post and money order. The first phase of this research has focused on identifying the reasons for this fall in performance. The initial findings have been shared through a conference on Postal Delivery Economics at Antwerp and an article titled ‘Challenges in Reform of the Indian Postal Service’ in the Economic and Political Weekly, Sept. 17, 2005.
The preliminary phase of the research points to a significant number of problems with India Post, many of them stemming from its being a public sector entity without a commercial mandate. The next phase of the research will focus on investigating the following issues:
- How far is privatisation desirable and feasible? If it is both, what is the optimal phasing in unbundling, corporatisation and privatisation?
- What proportions of IP’s revenue are accounted for by letter mail, direct mail, parcels and courier post and financial services? Where is it losing money? Does a natural monopoly exist in the letter-mail market? If not, is there a case for IP to remain a public monopoly? What strategies would help in ameliorating its losses (including shedding products)? Can the USO segment be better defined and made competitive, or would the better option be to subsidise it and let competition operate in the remaining sectors?
- How to leverage on the enormous network of IP? What economies of scope could be exploited (Internet, telephone, telemedicine, etc.)? Alternatively can the entire network be given away as a franchise? What is the relationship between delivery, network and logistics in the context of IP? What are the issues in unbundling the delivery and network segments of India Post?
- What is service quality and what have the trends been? Is service quality the real problem leading to eroding volumes, especially cream-skimming in the courier segment in the urban areas?
- What are the fundamental economic and regulatory problems confronting IP for its various products and markets? What are the costs (according to some reasonably well defined measure) of urban versus rural routes?
This research seeks answers to these questions, as well as to explore: 1) the current policy situation in India with respect to IP; and 2) alternative proposals for redesign toward a sustainable future operation. Presently data is a big problem. Because public monopolies consider service delivery much more important than keeping records of measurement of such delivery, we have no benchmarks. Also, due to absence of modern methods of costing various services, we are not clear which services are profitable and which are not; the existing figures are merely the starting points, requiring much refinement. It appears unlikely that reform proposals will encompass privatisation at this juncture (who would buy IP?), notwithstanding what the World Bank has to say about this. Clear definitions of the scope of the USO and a turnaround attitude towards subsidy-free commercial operations would definitely be included in the scope of any reform. (Subsidy-free here does not mean for each product and each region, but for the enterprise as a whole.) How to trigger a discussion of the needed changes and alternative proposals is probably the most pressing question for IP.
Methodological issues in this research are: examining for natural monopoly characteristics in IP’s three segments (delivery, network and logistics) by exploring the cost vs output relationships; analysing the cycle time of delivery of articles by studying the system of collection, sorting and delivery through intensive interviews with IP officers; analysing the potential for economies of scope through personal interviews with IP officers and by examining the facilities at the Post Office level in urban and rural areas; investigating simultaneous franchising possibilities through consultation with IT vendors; and analysing the competitiveness of IP by studying the structure of tariffs of IP and private courier operators and by survey of various sections of customers.
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