VAT Modernization and Competition in the Cross-border Mail Market

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market penetration by participants other than the designated national postal operators (DOs)compared to domestic markets. 7Furthermore, the cross-border market is highly concentrated market with a 19 percent of mailflow representing 80 percent of cross-border volumes (see ex. 1). This also means that themajority of the mail flows between DOs would be disproportionately damaged by costincreases resulting from VAT.1.1 Challenges in the Cross-border Mail MarketAs much as it is a fact in most of the domestic postal markets, the cross-border market ischallenged by competition from other communication platforms today. The relative marketshare vis-à-vis these platforms will continue to shrink, because of growing convergence ofonline and mobile technologies and the related decline of physical or paper-basedcommunication. This process is understood as electronic diversion or e-substitution. To acertain extent these challenges have been absorbed by tremendous operational improvementsand progression towards the current quality standards. At the cross-border level theseimprovements were supported by incentive-based remuneration schemes.Despite all these efforts, postal operators are facing major financial, operational and humancapital challenges that call on them to transform their businesses if they are to remain viablein the long-term. Resolving regulatory uncertainty and the need to address customer needsare pivotal to ensure that postal operators remain at the forefront of efficiencies for theircustomers. These challenges extend to the field of terminal dues remuneration schemes (orintercompany pricing), as these agreements take aim at market uncertainties and set standardsfor the cross-border postal service.Competition in the declining cross-border mail market is strong and growing, puttingadditional pressure on DOs to commit to their mandatory service requirements. Research bythe UPU shows that competition in the cross-border letter market has grown fromapproximately 12 percent in 2003 to reach nearly 23 percent in 2008. 8 It is in particular the7 Adrenale (2010), Market Research on International Letters, and Lightweight Parcels and Express Mail Service Items8 Consolidated data from industrialized countries as presented in extracts in Adrenale (2010), Market Research on InternationalLetters, and Lightweight Parcels and Express Mail Service Items4
apid growth of specialized services, such as cross-border expedited or deferred shipments,that are primarily going to foreign operators in this market segment. Drop-shipping andhybrid solutions such as destination printing increase the pressure on the traditional postalsystem. This process is accelerated by leading-edge electronic solutions which allow mailersto bypass the cross-border value chain up to the point of the sorting center or delivery officein the country of destination. According to a study by Adrenale (2010), as a result of thesedevelopments, the 7 percent annual growth in volume handled by competing operators hasbarely compensated for the continuous decline in volume handled by the designatedoperators. Given the complications in the cross-border mail market, it is essential that pricingand regulations (including the universal service obligation) are not putting further stress onthe cross-border postal service.1.2 Terminal DuesWithin this highly competitive market, designated operators have established cooperationmechanisms for network access on either a multilateral (REIMS) or a bilateral basis,bypassing the UPU remuneration system. In the UPU system, in order to facilitate networkaccess, the parties deliver mail supplied by another party at a fixed percentage of thedomestic rate for a 20 grams priority letter. This percentage is indicative since the UPUTerminal Dues rates are surrounded by caps and floors. REIMS is a commercial or voluntaryagreement which provides a system for terminal dues based on cost and service quality forpostal operators. The REIMS agreement pursues quality of service standards that are moreambitious than the targets under the EU Postal Directive. 9 The current REIMS agreement setsindividualized penalties for posts that do not reach the next day delivery target (afterreception at the inbound Office of Exchange). These penalties ensure that all efforts are madeto maintain a high quality of service. Today two-thirds of total European mail volumes arenot settled under REIMS agreement but through bilateral agreements between DOs oraccording to UPU standards. 10Community legislation provides for a minimum mandatory universal service to be providedthroughout the Community to all citizens, wherever they are located at affordable prices.Additionally it sets standards for national postal services and for intra-Community cross-9 REIMS is the only agreement in line with EU Directive, requiring rates to be linked to QoS and real cost of handling the mail10 Subject to changes, parties joining/ leaving REIMS, bilateral agreements, etc. Estimation from October 2010.5
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VAT Modernization and Competition in the Cross-border Mail Market

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