Tendering Universal Service Obligations in Liberalized Postal Markets

Tendering Universal Service Obligations in Liberalized Postal Markets An Outline of Thought Christian Jaag Urs Trinkner University of St. Gallen and Swiss Post University of Zürich and Swiss Post GPREN Postal Research Conference April 28 th 2008 University of St. Gallen University of Zürich Jaag/Trinkner - 1

Introduction • Tendering is often used to confer to someone – a right (e. g. to use a certain spectrum for mobile telecommunication) – A duty (e. g. to build a tunnel across the alps) In these cases, the winningparty usuallyoperatesin a well definedmarket environment. • Recently, tendering has also been used to assign universal services, e. g. in telecommunications. What will the market environmentbe? • In the postal market Tendering of postal USO envisioned in Germany, Netherlands, Switzerland. University of St. Gallen University of Zürich Jaag/Trinkner - 2

Public Procurement Public need Definition of a package of duties and rights, possibly including exclusivity Public or private provision Public provision Contracting Tendering / negotiation Negotiation Tendering Subcontracting Negotiation Tendering University of St. Gallen University of Zürich Jaag/Trinkner - 3

Issues with Universal Service Provision • Allocative options – Exogenous choice – Beauty contest – Tender / reverse auction • Distributive options – Ex ante compensation (based on estimated cost) – Ex post compensation (based on „true“ cost) • Goal: Efficient provision a) By most efficient operator selectionproblem b) With most efficient technology incentiveproblem c) At the lowest possible public cost transferproblem University of St. Gallen University of Zürich Jaag/Trinkner - 4

Tendering USO will solve all problems… Why? It applies market forces where a market would otherwise not exist „competition for the market“ Why not? Competition has to be well designed to work properly… University of St. Gallen University of Zürich Jaag/Trinkner - 5

Simple Case: Homogeneous Operators True cost no selection / incentiveproblems Cost estimates • Winner‘s curse: The operator who underestimates the cost the most wins the auction High risk taken by bidding operators • If operators realize this, they ask for a high price! • If operators do not realize this: Renegotiation! Given its „design cost“, USO tendering is expensive; the transfer problem remains unsolved. University of St. Gallen University of Zürich Jaag/Trinkner - 6

The Net Cost of Providing Universal Service The net cost of providing universal services depends on • • • Universal service provider (efficiency? ) Competitors (strategy) Regulator (network access, labor market) Technology Consumer behavior / preferences University of St. Gallen University of Zürich Jaag/Trinkner - 7

More realistic case: Heterogeneous Operators True cost (operator-specific ) Cost estimates Tendering solves the incentive problem. How important is the a) selection problem? b) transfer problem? a) large if technology is „volatile“ b) large if competitive/regulatory risk is high University of St. Gallen University of Zürich Jaag/Trinkner - 8

• Ubiquity – Collection – Delivery – (Sorting) • Quality – Frequency of Delivery – Timeliness Cost Predictability Contract Design – Dimensions of US • Price – Uniformity – Level (affordable, moderate, reasonable) University of St. Gallen University of Zürich Jaag/Trinkner - 9

Contract Design – Trade-Offs • Duration – Long-term contracts for investment incentives – Short-term contract for technological flexibility • Level of Aggregation – Global approach for economies of scale and scope – Disaggregated approach allows for yardstick competition • Concreteness – Detailed contracts to avoid renegotiation – Openness allows for commercial/technological flexibility • Ownership of Postal Operators – Fairness calls for full privatization – State ownership facilitates governance University of St. Gallen University of Zürich Jaag/Trinkner - 10

Conclusion • Tendering is a potentially powerful tool for efficient universal service provision. • There are fundamental issues to be considered, e. g. that tendering introduces new risks. • Trade-offs in design hard to solve. • Do we know what we are doing? University of St. Gallen University of Zürich Jaag/Trinkner - 11

Thank you. Christian Jaag Swiss Post Regulatory and International Affairs Viktoriastrasse 21 3030 Bern Christian. jaag@post. ch University of St. Gallen University of Zürich Jaag/Trinkner - 12