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Fundamental Review Indispensable for the Privatization of Postal Services
- Evaluation of Guidelines for the Privatization of Postal Services and Related Problems -

September 09, 2004

Proposal

(a) Based on discussions at the Council on Economic and Fiscal Policy, Cabinet meeting approval of the Guidelines for the privatization of postal services is now in sight. Opposition to the privatization of postal services remains strong, and, while there is the deeply rooted view that for the time being unified management of postal services should be maintained, it is expected that, at the behest of Prime Minister Junichiro Koizumi, endorsement will be given by the Council for the policy of initially splitting postal services into four divisions, in other words, from April 2007, spinning services off into the four business entities, post office network management, mail delivery, postal savings and postal insurance. Our evaluation of the Guidelines for the privatization of postal services (based on various media at present) and our proposals with respect to future issues are as follows.

(b) The establishment of Guidelines for the privatization of postal services is an important step for promoting the biggest reform since the Meiji era that will revolutionize Japan's financial, administrative, fiscal and social systems, and also has crucial significance for realizing Koizumi's structural reforms "from public to private" and "from savings to investment." The aim of postal reforms is not confined to making the services more convenient for the Japanese people. The main objective is to seek to strengthen the competitiveness of each service by establishing the market mechanism and to seek effective utilization of its private financial assets of 1,400 trillion yen, which surpass those of other countries, so that Japan's financial sector, economy and industry increase in vitality and achieve sustained growth and development in the twenty-first century, in other words, to switch funding routes from the construction, maintenance and repair of infrequently used roads and rest homes to areas, such as the creation of new ventures, where Japan's economy and industry will develop and new employment will be created. Given this perspective, there are three particularly important problems, described below.

(c) The first is the immensity of scale. There is considerable concern that, because all four services are remarkably large in comparison with private enterprises, even if the government guarantee is lifted completely, a tacit government guarantee will remain. Even if total abolition of the government guarantee is assumed on the government side and there is no longer any provision of capital by the government, the "too Big to Fail" situation is anticipated whereby, in the event of a business crisis or other emergency, due to the seriousness of the blow to the country's economy as a whole, the government would have no choice but to bail the postal services out. Moreover, because such a view is held by even some Japanese people, to all intents and purposes, a credibility gap will arise between competing private enterprises. From the outset, the Japanese people will still have the unspoken expectation of a government guarantee not only in the event of an emergency but also during normal operation, and, what is more, the facilities, information, human networks, etc. previously built up as a public corporation will provide a competitive edge over private companies. Considerable down-scaling is a major premise in order to achieve an equal footing with private companies. However, there are no clear provisions in this respect. Moreover, recently the unequal footing with private companies is expanding, for example, besides the start of efforts to advance into new business such as the active expansion of a home express delivery service and the sale of new life insurance products, it looks like sales of investment trusts in the preparatory period and gradual entry to the financing business during the transition period will be authorized, and there is rising concern that the distortion of market competition will be amplified further.

(d) The second problem is the inadequacy of risk isolation between the services. Under the Guidelines, from April 2007 postal services will be split into four businesses, post office network management, mail delivery, postal savings and postal insurance, and although separate joint-stock companies will be incorporated, a holding company to oversee the four services (the government will hold 100% of stock initially, and more than one third even at the end of fiscal year 2016). Under these guidelines, there is virtually no difference from the current public corporation format under which unified management is carried out. On the other hand, it is expected that the idea of selling stock and realizing privately owned, privately run postal savings and postal insurance companies in the transition period will be incorporated, but since the definition of "privately owned, privately run" is ambiguous, it is unclear whether or not this ensures the path to complete privatization, that is, making all the stock of the postal savings and postal insurance companies privately owned by the end of FY2016, which is the final deadline of the transition period. To begin with, isolation of business risks does not simply mean [1]preventing the negative impact from other businesses spreading to financial services in order to secure the soundness of financial systems, [2] preventing distortion in the distribution of resources is also an important aim. In other words, since profitability and growth potential varies between each service, from the perspective of areas with high profitability and growth potential, business expansion is restricted due to areas with low profitability and growth potential. Meanwhile, from the perspective of areas with low profitability and growth potential, because, through the invocation of credibility in areas with high profitability and growth potential, business expansion under favorable terms and conditions is possible, similarity in the conditions of competition with rival enterprises, in other words, an equal footing is not secured, and market principles fail to operate properly, this brings about overinvestment and underinvestment, over-employment and underemployment. In addition to such problems concerning business format, we can also not overlook the problem that market distortion may increase on concern that the postal savings and postal insurance companies will essentially be in charge of supervising and managing the separation of debts with a government guarantee and post-privatization debts without a government guarantee, in other words, new and old accounts, and that there will be juggling of excessive profits or losses through unified management.

(e) The third problem is emphasis on universal service. In the current postal reform debate, Deutsche Post is rated as having failed to maintain universal service, as the emphasis was put on strengthening competitiveness through privatization, and being driven to government regulation. This is based on the following circumstances. As the number of post offices gradually dropped through streamlining due to privatization from 29,285 at the end of 1990 to almost half that at 15,331 in 1997, under the Universal Service Ordinance promulgated by the German Federal Government in 1998, Deutsche Post became subject to regulations for the provision of a certain service, including [1]12,000 post offices as the minimum total number of post offices, [2]the establishment of at least one post office in self-governing bodies with a population of more than 4,000, without exception, and [3] no more than 2km distance between post offices in city areas. However, moves in recent years are at odds with such a view. In other words, at the beginning of 2003 Deutsche Post increased the number of post offices on its own initiative. While this results from the fact that, due to the German Federal Government's 2002 system reforms for postal market liberalization in line with EU postal service liberalization, from 2003 the speed of postal service liberalization also picked up in Germany, it also stems from the fact that under such conditions Deutsche Post recognized universal service as a source of competitiveness, and started to strengthen its domestic sales foundation. If we take such developments into consideration, rather than suppressing a move from public to private by over-emphasizing universal service, if anything, by actively utilizing and introducing the principle of competition, we should seek to improve the efficiency of resource distribution and at the same time move towards the expansion and improvement of services.

(f) From this perspective, in the process of future adjustment and debate with the governing party, introduction of bills and actual execution of reforms, the question of how to eliminate the ambiguity and room for discretion in the Guidelines, which could also become a divisive issue between the reformists and the anti-reformists, will determine whether or not the expected aims of the reforms are met. Therefore, the realization of the following three points is extremely important.

(i) First, as a major premise for eradicating the tacit government guarantee and realizing a completely equal footing with private companies, it is essential to downscale the business of the postal savings and postal insurance companies and to restrict new business expansion during the preparatory and transition periods. We must bear in mind that, if re-expansion of scale or prior expansion of business scale is carried out on the pretext of making services more convenient for the Japanese people, ultimately this will bring about a weakening of Japan's financial systems and will not lead to any real increase in benefits to the Japanese people.

(ii) As long as the holding company format is maintained, complete isolation of business risks is difficult. On this basis, it is essential to switch from a holding company format to joint-stock company format with the four services completely separated, and by the end of 2016, which is the final deadline of the transition period, at the very latest, the holding company needs to be abolished and the entire stock of the postal savings and postal insurance companies at the very least needs to be released into the private sector.

(iii) With respect to universal service, also on the basis of the postal reform objective of correcting distortion in resource distribution, we should look squarely at the success story of Deutsche Post and, after establishing a clear time limit, we should aim to eliminate government involvement and to maintain, expand and improve services through market principles.

For more information on the content of this report, please contact
Kenji Yumoto/Hidehiko Fujii
Economics Department

Tel: 03-3288-4524/03-3288-4615
E-mail:yumoto.kenji@jri.co.jp/fujii.hidehiko@jri.co.jp

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