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Annual Privatization Report 2005 - Privatization Going Postal in Japan

January 1, 2005

Privatization Going Postal in Japan


While the United States Postal Service (USPS) has proposed another postage increase for 2006 (from 37 cents to 39 cents for a first-class stamp),1 and the government monopoly on mail delivery shows no sign of yielding to competition in this nation's "free-market" economy, significant privatization efforts are underway in Japan.

Prime Minister Junichiro Koizumi has made postal privatization his top priority. It is a goal he has pursued for over 20 years, since he first became an elected official.2 As Koizumi recently explained to the Japanese House of Representatives, "Accomplishing postal privatization is the structural reform I'm proceeding with, and (it) is my political responsibility to the people. As the postal privatization bills, which are the most important task for the Koizumi administration, are presented for deliberation at the Lower House plenary, I feel more strongly that the bills must be given final approval by the Diet."3


Koizumi's Privatization Plan

Koizumi's proposal would privatize postal services over a 10-year period beginning in April 2007. Japan's postal privatization involves much more than privatization of mail delivery services, however. In addition to delivering the mail, the Japanese postal system offers financial services, offers life insurance and serves as a savings depository (people can set up savings accounts but cannot borrow money). Seven years of deflation have resulted in a virtually zero interest rate,4 which prevents banks from offering interest payments on deposits. Government postal savings, however, are allowed to accumulate a nominal interest fee, making postal savings a more attractive investment option than commercial banks.5 This incentive has turned the Japanese postal system into the largest financial institution in the world, with $3.6 trillion in savings and insurance assets.6 This is three times greater than the savings deposits in Mitsubishi Tokyo Financial Group Inc., the nation's largest private holder of deposits,7 and represents the wealth of approximately one-fourth of individuals' total assets.8

Koizumi's plan would break up the Japan Postal Services Public Corporation (Japan Postal) into four independent companies to operate the mail delivery, postal savings, life insurance, and branch management/over-the-counter services. During the 10-year transition period, the government would sell off all shares of the postal savings and life insurance companies. In addition, it would gradually sell off shares of a holding company that would own all of the mail delivery and over-the-counter businesses, although it would retain control of at least one-third of these shares and mandate that mail services are made available nationwide.9

Koizumi has already had to make a number of concessions to advance his proposal to the Diet. In addition to allowing the government to maintain control of a portion of the holding company, instead of divesting all ownership as Koizumi wanted,10 Koizumi has assented to the establishment of a ¥2 trillion ($18.4 billion) fund to help offset expected losses in post offices in rural areas.11 In addition, the revised proposal would allow the partially government-owned holding company to purchase shares of the savings and life insurance companies on the open market, thereby allowing the government to continue to exert indirect control over these "privatized" businesses.12


Political Obstacles to Japanese Postal Privatization

The postal privatization plan has also been hampered by political maneuvering. There is much division over the proposal, even within Koizumi's ruling Liberal Democratic Party (LDP). This intra-party division stems from fears of losing the support of Japan Post workers and relatives, a substantial LDP voting bloc. Japan Post's 270,000 employees (plus their families and friends) "are reputed to be able to mobilize hundreds of thousands of votes for the LDP."13 LDP privatization opponents fear that privatization may result in job (and, consequently, vote) losses in rural areas that are traditionally strong bases of support for the LDP. Among other dissenters, some are opposed to privatization altogether, others support privatization but take issue with perceived flaws and concessions in the legislation, and others have simply been put off by what is, in their view, Koizumi's abrasive style and overzealous efforts to force the legislation upon the Diet.14

Koizumi has not backed down in view of these concerns, however. He replaced two top officials in charge of postal policy whose views on privatization he deemed out of line with his own.15 To further shore up LDP support, Koizumi has made it known that members' actions on the postal privatization issue will be taken into consideration when he considers candidates for positions in his Cabinet, which he intends to reshuffle this fall.16 He has also threatened to dissolve Parliament and call new elections, should his privatization measures fail.17 New elections are a risk the LDP does not want to take at this time because victory would be far from certain.18 In addition, if new elections are called, Koizumi may punish LDP dissenters by preventing them from running as official party candidates.19


Benefits of Privatization

Despite the partisan bickering, postal privatization would mark a very positive development in Japan. Market incentives ensure that a privatized postal system will be more efficient than the current system. The profit motive will lead to the elimination of current bureaucratic fat, as the private companies will seek to minimize costs and enhance customer service to improve business. Many government employees may lose their jobs (up to about 30 percent of the existing workforce, by some estimates20), benefits may prove to outweigh these losses: One, the vast majority of labor reductions can likely be obtained through attrition or early retirement incentives (see the international case studies below), and two, this just illustrates the level of waste in the current system. Considering that, according to a Shukan Post investigation, Japan Postal is "rife with corruption;"21 greater incentives to weed out incompetent or criminal employees should be welcomed by customers and taxpayers.

In addition to the benefits of market incentives, the near-elimination of political incentives and influences should spell even more relief for taxpayers. The postal system "has long been criticized for devouring the financial assets of Japanese individuals and funneling them to public projects."22 Furthermore, "Most of the funds held by Japan Post have been invested in government bonds to support debt-ridden state coffers and keep inefficient government-backed corporations afloat."23

In essence, government intervention has squeezed private firms out of profitable financial markets and wasted the profits on inefficient programs. This waste and diversion of private resources (taxpayer dollars) have suppressed economic growth and made Japan less competitive in the world market. Privatization would eliminate such pork-barrel spending and direct revenues to their most productive uses while lowering costs for consumers.


Postal Privatization Around the World

Within the last 20 years, a wave of postal privatization has swept Europe, Australia, New Zealand, and elsewhere. Consider the following successful postal privatization and de-monopolization efforts:

New Zealand. While New Zealand has not shed its government-owned postal services company, it eliminated its monopoly, allowing for full competition—with impressive results. In 1986, New Zealand began the postal reform trend when it allowed full competition for letters that weighed at least 500 grams (1.1 pounds) or cost at least NZ$1.75 (about 4.5 times the stamp price at the time). New Zealand gradually relaxed these restrictions until the entire monopoly was eliminated in 1998. The government required New Zealand Post (which it continues to own) to maintain universal service, but not to charge uniform rates. Under competition, New Zealand Post has delivered more mail while dramatically cutting costs, increasing worker productivity, and reducing prices. This even impressed the U.S. Postal Service, which noted: "Since corporatization, NZP has modernized its technology, transportation network, and retail facilities, and invested in subsidiary businesses, all funded by retained earnings and the sale of surplus assets. By 1995, with 30 percent more mail to deliver, costs had been reduced by 30 percent, and labor productivity had doubled."24

Basic postage rates fell 11 percent—from NZ$0.45 to NZ$0.40—in 1995, and the real price of a letter dropped approximately 30 percent between 1987 and 1995. Moreover, New Zealand Post has earned a profit every year since 1986.25

The Netherlands. The Netherlands privatized most of its postal service when it sold off 52 percent of Royal PTT Nederland (KPN), including PTT Post, through two public offerings in 1994 and 1995. In August 1996, PTT Post purchased Australian transportation conglomerate TNT. The current postal service company was formed when KPN spun off TNT Post Group (TPG) in June 1998. Though mostly privately owned, TPG maintains a monopoly over the carriage of letters weighing 500 grams or less. TPG has pronounced its support for the repeal of its monopoly, provided other European carriers repeal their monopolies as well. Results in the Netherlands have likewise been encouraging. According to an international survey, the Netherlands, along with Sweden, provides the most efficient postal service in Europe.26

Other Nations:

Most of the privatization concerns in Japan (and elsewhere) seem to center on two issues: job losses and universal service. While newly cost-conscious privatized or de-monopolized postal companies often do significantly reduce their workforces—by 40 percent in New Zealand, 38 percent in Germany, and 30 percent in Sweden, for example—the reductions typically come mainly through attrition and early retirement and incentive packages.31 These strategies allow companies to cut the workforce—and costs—without significant layoffs. The universal service issue is similarly overblown. As a Hoover Institution article notes, "de-monopolized postal services have not sacrificed delivery to rural areas. Universal service is an important business asset, and firms facing competition have an incentive to maintain it."32 In a truly free (de-monopolized) market, for example, even if a major carrier stopped serving certain areas of the country or stopped delivery on certain days of the week, consumers could simply decide to do business with another carrier that better met their service needs. In cases where the defecting business is the only carrier in town, there would be an obvious demand and profit opportunity that other carriers (or potential, yet-to-be formed companies) would be happy to serve.


Postal Reform in the United States?

Unfortunately, postal reform is much more advanced in the "Old World" than it is here in the "land of opportunity." Although both the House and Senate unanimously passed postal reform bills out of committee in 2004, the reforms were modest at best and never made it to the floor of either chamber due to relatively minor differences over pension accounting issues.33 The cost of communication has dropped dramatically in recent years—most notably due to e-mail and falling long-distance telephone rates—resulting in a decline in first-class mail, which accounts for roughly half of revenues. The USPS has responded by adding 5.4 million delivery points between 2000 and 2003;34 engaging in "non-core" businesses such as selling phone cards, T-shirts, and mugs (which the USPS lost $85 million on during the 1990s35); and merely crossing its fingers and hoping that revenue from third-class (advertising, or "junk") mail can pick up the slack (it has in the past year or two, but how long will this last?). In addition, according to Robert Cohen, formerly a member of the U.S. Postal Rate Commission, the USPS suffers from a high wage premium (it pays an estimated 21.2 to 35.7 percent more than would a comparable private-sector employer, which represents 12 to 20 percent of total costs) and low productivity increases (only 9.2 percent from 1970 to 1999).36

As an open letter from the National Taxpayers Union to members of Congress observes, "Given that the United States is generally regarded to possess one of the freest economies in the world, it is perplexing that more centrally planned countries are the ones pursuing postal privatization options. Germany, New Zealand, Sweden, Japan, South Africa, the Netherlands, and even the Philippines and Jordan have implemented or are considering some degree of privatization for mail services."37 In light of the aforementioned inefficiencies in the USPS and the success of other nations around the world in privatizing and deregulating postal services, it is time the United States eliminated its postal monopoly and allowed consumers to realize lower prices and better service through privatization.


Conclusion

Japan is well on its way to significantly improving not only its mail delivery services but its financial services sector as well through Prime Minister Koizumi's privatization proposal. While the premier's plan would still allow for some government control—direct and indirect—and the plan would not be fully implemented until 2017, privatization of the Japanese postal system would represent a sizable step in the right direction.

There is no question that postal services can be rendered adequately by the private sector. Just look around the world! Postal privatization and deregulation are reducing prices and wasteful spending, increasing productivity, and improving resource allocation. In addition, privatization and competition will surely lead to greater quality, customer service, and choice. As Belgian Senator and deregulation advocate Philippe Bodson has noted, "as long as markets remain closed or only limitedly opened to competition, postal users will continue to lack choice and . . . pay excessive prices."38


Endnotes

1 Randolph E. Schmid, "Postal Service Seeks 2-Cent Stamp Increase," San Francisco Chronicle, April 8, 2005, http://www.sfgate.com/cgi-
bin/article.cgi?file=/news/archive/2005/04/08/national/a081903D54.DTL
.

2 Shihoko Goto, "Will postal privatization boost Japan?" Washington Times, September 7, 2004.

3 Tetsushi Kajimoto, "Diet debates post reform bills amid boycott by DPJ, SDP," Japan Times, May 27, 2005, http://www.japantimes.co.jp/cgi-bin/makeprfy.pl5?nn20050527a3.htm.

4 "BOJ to Keep Rates Zero, Maintain Reserve Target, Survey Shows," Bloomberg, June 10, 2005.

5 Exemptions from paying taxes and risk premiums to the deposit insurance fund gives the government-operated savings and life insurance businesses an additional—and significant—advantage over private-sector competitors.

6 Goto, "Will postal privatization boost Japan?"

7 "Japan's premier to dissolve parliament if postal reform bill fails," Associated Press, June 5, 2005.

8 Reiji Yoshida, "Cabinet OKs postal reform package amid chaos in LDP," Japan Times, April 28, 2005, http://www.japantimes.co.jp/cgi-bin/makeprfy.pl5?nn20050428a1.htm.

9 "Two firms to form core bases for privatization," Asia Times, February 15, 2005, http://www.atimes.com/atimes/Japan/GB15Dh02.html.

10 Michiyo Ishida, "Japan's PM sends postal privatization bill to parliament," channelnewsasia.com, April 29, 2005, http://www.channelnewsasia.com/stories/eastasia/view/145167/1/.html.

11 Reiji Yoshida, "Postal reform plan is watered down but moves forward," Japan Times, http://www.japantimes.co.jp/cgi-bin/makeprfy.pl5?nn20050426f2.htm.

12 Ibid. See also Reiji Yoshida, "Cabinet OKs compromise postal plan: LDP members protect self-interests, crush Koizumi's effort for revamp," Japan Times, April 5, 2005, http://www.japantimes.co.jp/cgi-bin/getarticle.pl5?nn20050405a1.htm.

13 "Japanese government moves to privatize post," ABC Radio Australia, April 28, 2005, http://www.abc.net.au/ra/news/stories/s1355115.htm.

14 "Postal Reform / LDP facing tough battle to stifle privatization dissenters," Yomiuri Shimbun, May 2, 2005.

15 "Koizumi replaces 2 bureaucrats due to discord over postal policy," Kyodo News, May 17, 2005.

16 Reiji Yoshida, "Koizumi back in the hot seat over postal privatization bills," Japan Times, May 14, 2005, http://www.japantimes.co.jp/cgi-bin/makeprfy.pl5?nn20050514a6.htm.

17 "Japan's premier to dissolve parliament if postal reform bill fails," Associated Press, June 5, 2005.

18 Ishida, "Japan's PM sends postal privatization bill to parliament."

19 Reiji Yoshida, "Koizumi back in the hot seat over postal privatization bills," Japan Times, May 14, 2005, http://www.japantimes.co.jp/cgi-bin/makeprfy.pl5?nn20050514a6.htm.

20 "Japan: Opposition to plan to privatise massive postal service," ABC Radio Australia, September 17, 2004, http://www.abc.net.au/ra/asiapac/programs/s1201866.htm.

21 "Postal service rife with corruption," Japan Today, August 23, 2004, http://www.japantoday.com/e/tools/print.asp?content=shukan&id=240.

22 Yoshida, "Cabinet OKs compromise postal plan: LDP members protect self-interests, crush Koizumi's effort for revamp."

23 Yoshida, "Cabinet OKs postal reform package amid chaos in LDP."

24 U.S. Postal Service, Transformation Plan, April 2002, p. H-23, quoted in Rick Geddes, The Structure and Effect of International Postal Reform (Washington D.C.: American Enterprise Institute, May 1, 2003), http://www.aei.org/publications/pubID.17066,filter.all/pub_detail.asp.

25 Rick Geddes, The Structure and Effect of International Postal Reform (Washington D.C.: American Enterprise Institute, May 1, 2003), http://www.aei.org/publications/pubID.17066,filter.all/pub_detail.asp.

26 Ibid.

27 Ibid.

28 "CVC Capital Buys Stake in Postal Service," Associated Press, June 8, 2005

29 "France's La Poste aims for 9 pct of home mortgage market within 10 yrs," Forbes.com, May 13, 2005, http://www.forbes.com/home/feeds/afx/2005/05/13/afx2025383.html.

30 International Postal Update, Consumer Postal Council, March 14, 2005, http://www.postalconsumers.org/.

31 Geddes, The Structure and Effect of International Postal Reform.

32 Rick Geddes, A Twenty-first-Century Postal Service (Stanford, California: Hoover Institution, July 2002), p. 2, http://www-hoover.stanford.edu/pubaffairs/we/2002/geddes_0702.pdf.

33 Tad DeHaven, An Open Letter to Congress: It's Time to Seriously Overhaul the U.S. Postal Service, Not Tweak It (Alexandria, Virginia: National Taxpayers Union, January 24, 2005), http://www.ntu.org/pdf/L050124_Postalreform.pdf.

34 Charlie Anderson, "DST, Hallmark: USPS needs first-class reform," Kansas City Business Journal, April 30, 2004, http://kansascity.bizjournals.com/kansascity/stories/2004/05/03/story3.html.

35 Elizabeth Wasserman, "Pushing the Envelope," The Industry Standard, March 5, 2001, cited in Scott Esposito, "Time for the Mail Monopoly to Go," The Freeman: Ideas on Liberty, February 2002, http://www.fee.org/vnews.php?nid=5002.

36 Robert Cohen, The Cost of Universal Service in the U.S., Presentation before the AEI Conference "The Mission of the Postal Service and the Universal Service Obligation," April 30, 2003, p. 13, http://www.aei.org/docLib/20030429_Cohen.pdf.

37 Tad DeHaven, An Open Letter to Congress: It's Time to Seriously Overhaul the U.S. Postal Service, Not Tweak It.

38 Don Soifer, "America is No Free-Market Leader on Postal Reform," Human Events Online, December 14, 2004, http://www.postalconsumers.org/content/041216.asp.




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