End of the Route
I Ran the Postal Service; it Should be Privatized
By William J. Henderson
Sunday, September 2, 2001; Page B01
Not long ago, it would have been unimaginable. But last week, under the terms of a $7.2 billion contract, FedEx began carrying and helping to sort some first-class, priority and express mail for the U.S. Postal Service.
While having contracts with private companies is nothing new (airlines have tossed sacks of mail into their cargo holds for as long as they've been flying), the deal with FedEx, the Postal Service's traditional competitor, is a major step forward in the Postal Service's increasing collaboration with private business. The most visible sign of that collaboration, and the symbol of the extent to which the Postal Service is rethinking business as usual, are the distinctive FedEx drop boxes that began appearing at neighborhood post offices last spring.
As the postmaster general until I retired three months ago, I oversaw the negotiation of the FedEx deal. And I continue to see it as an innovative solution for a Postal Service struggling to remain competitive under market conditions that have changed strikingly over the past decade. But such alliances with private business don't go nearly far enough.
What the Postal Service needs now is nothing short of privatization.
And while I've said in the past that privatization is inevitable, I'm saying now that it's something that must be done.
Privatization may seem far-fetched, but it's not. For all intents and purposes, the U.S. Postal Serviceis already a $65 billion corporation. It is the only government structure organized along corporate lines. It has a board of directors. It is concerned with profit and loss. It is the only government agency I know of that publishes a profit and loss statement for public consumption. And like any corporation, all of the Postal Service's operating revenue comes from its customers.
There's a misconception that the Postal Service gets a huge appropriation from Congress every year. In fact, it is no longer a ward of the U.S. Treasury and the taxpayer; it hasn't received tax dollars for its operating expenses since 1983. The only federal funding it gets -- and this represents a tiny fraction, less than 1 percent, of its budget -- pays for services rendered to the government in two ways: first, providing free mailing services for the blind, as required by law; and second, Congress's own franking privileges.
"We're acting like a real business because we are a real business," Deputy Postmaster General John Nolan told this newspaper in June.
But for all the ways in which the Postal Service already resembles a private company, it lacks the advantages of any other corporation, such as being able to turn on a dime when it comes to rate changes, perhaps raising prices at times of high demand and lowering prices to entice customers during traditionally slow times, which for the Postal Service means summer. Today, a price change requires the permission of the Postal Rate Commission -- a yearlong process.
And unlike a private company, the Postal Service has a universal service obligation, meaning it must deliver everywhere, six days a week, at a regularly scheduled time, making the delivery even for a single piece of mail, which is not cost-effective. And it means delivering in the Grand Canyon and in rural Alaska and in high-risk neighborhoods and lots of other places where delivery is not cost-effective.
The trade-off is that the Postal Service gets monopoly protection; no private company is allowed to compete with it head to head by carrying letter mail or using the mailbox. It should give up that protection for the greater benefits of privatization.
Exactly how the Postal Service should be privatized is a public-policy question, and I'm not suggesting we should simply sell the whole thing to the highest bidder. One possibility is for it to be largely publicly owned -- even if the government has a "golden share," a means by which it would retain some decision-making authority in the corporate structure without owning it.
But the best option, it seems to me, would be an employee-owned Postal Service using an ESOP, an employee stock-ownership plan, which would motivate workers by allocating stock to them over time. Postal employees would benefit most and would work hardest if they owned the company, in much the same way that employees of Delta Airlines own theirs. In an employee-owned postal company, raises would be based on stock value. And as the company grew in value, employee wealth would grow as well.
How the monopoly would be phased out -- whether it would happen everywhere, and whether it would be phased out gradually -- would also have to be hammered out in public debate. As a matter of public policy, the government can't and won't allow an end to its universal service obligation. We can't end up having remote areas or the inner cities grossly overcharged for the delivery of goods. The cost of meeting that obligation will have to be built into the rates. But I firmly believe this can be accomplished, because a company freed from the current constraints will be able to raise enough revenue to continue to deliver mail to all its customers -- and be successful.
And what about those rates? Would they rise under privatization? Not necessarily. They might even go down. Under the current system, the postal system makes money in the fall and winter. And it loses money each summer. With flexibility, it could do what it takes to make money in the summer, like lowering prices. It could also raise prices during the peak -- from September through February. But lowering prices during the lull would be a more prudent business decision.
However radical the idea of privatizing the national postal service may seem to many Americans, it's a concept the rest of the world has been taking seriously for years. That became clear to me when I was the Postal Service's chief operating officer in the mid-1990s, when postal administrations in New Zealand, the Netherlands, Germany, Ireland, Britain, France and Canada wereconsidering restructuring how they did business. Some have since commercialized -- that is, they have become companies wholly owned by the government. The Dutch and the Germans have opted for outright privatization, an option that every other postal service in the industrialized world is considering. In an interesting twist on the public-private debate, the privatized Deutsche Post is now the majority shareholder of DHL, the international shipping company. Deutsche Post also owns the largest bank in Germany in addition to its express-mail business and a regular-mail business. Although the geographic and demographic challenges those systems face are very different from our own, I believe they provide powerful models for change.
Persuading the postal workers' unions that privatization is a good thing won't be easy. But even there I see encouraging changes. Ten years ago, the rank and file viewed privatization as a failure of management. Today it's seen more as a natural outcome of a changing marketplace. Postal workers understand far better today than a decade ago that competition -- from great companies like UPS and FedEx, and from e-mail and telemarketing -- is a fact of life. Just like you, they see the brown truck and the FedEx truck everywhere, and they have adapted. As a result, there is much less of a culture of entitlement than before. Employees know the organization must make changes to survive.
Ultimately, if privatization is to take place, it will need the support of President Bush, who should see the move for what it is -- fiscally prudent. The Postal Service's "market capitalization" -- that is, its total value at current market prices if it were a publicly traded company -- is probably between $65 billion and $100 billion, an all-time high. That figure is likely to dwindle over the next few years as competition increases further.
I can't believe that 25 years from now the Postal Service will still be owned by the federal government. But the point is that, as with any government asset, this one needs to be maximized. And that means we need to free ourselves from the usual discussion about controlling costs or keeping rates stable or mailing more, all of which is simply a form of denial about the real issue. The model itself is not going to work for the long haul: It must be changed.
William Henderson was the U.S. postmaster general from 1998 to 2001.
© 2001 The Washington Post Company
